WASHINGTON, Jan. 21 (Xinhua)-- The global economy is poised for faster growth in 2014 as headwinds gradually ease, but deflation and financial sector risks could threaten the outlook, the International Monetary Fund (IMF) said Tuesday in its updated World Economic Outlook.
Global growth would accelerate to 3.7 percent in 2014 from 3 percent last year with the advanced economies on a stronger footing, according to the flagship report.
Growth in advanced economies was expected to be 2.2 percent in 2014, up from 1.3 percent in 2013. It was 0.2 percentage point higher than the rate projected in October.
The U.S. economic growth was predicted to accelerate from 1.9 percent in 2013 to 2.8 percent in 2014. The pickup in 2014 would be carried by domestic demand, supported in part by a reduction in the fiscal drag as a result of the recent budget agreement.
The global lender said growth in the euro area, which is " turning the corner from recession to recovery," would strengthen to 1 percent in 2014 and 1.4 percent in 2015.
In Japan, growth was expected to slow more gradually compared with October estimate as temporary fiscal stimulus should partly offset the drag from the consumption tax increase in early 2014. Its annual growth would remain broadly unchanged at 1.7 percent in 2014, before moderating to 1 percent in 2015.
Growth in emerging market and developing economies was projected to accelerate from 4.7 percent in 2013 to 5.1 percent in 2014. China's growth rate was expected to slow down slightly from 7.7 percent in 2013 to 7.5 percent in 2014, but still an upgrade from the October estimate.
"In many emerging market and developing economies, stronger external demand from advanced economies will lift growth, although domestic weaknesses remain a concern," said the report.
"Growth in China rebounded strongly in the second half of 2013, due largely to an acceleration in investment. This surge is expected to be temporary, in part because of policy measures aimed at slowing credit growth and raising the cost of capital," said the report.
"Ensuring robust growth and managing vulnerabilities remain global priorities despite the expected strengthening of activity," the IMF suggested.
"The recovery is strengthening," which was largely anticipated, said IMF chief economist Olivier Blanchard. "The basic reason behind the stronger recovery is that the brakes to the recovery are progressively being loosened. The drag from fiscal consolidation is diminishing. The financial system is slowly healing. Uncertainty is decreasing."
However, he noted, the recovery is "weak and uneven" and subject to risks of low inflation and financial sector volatility.
The IMF sounded alarm on low inflation, saying risks to activity associated with very low inflation in advanced economies, especially the euro area, have come to the fore. If low inflation turns into deflation, Blanchard warned, it would bring higher real interest rate, higher public and private debt burdens, lower demand and lower growth.
"As the recovery takes hold in advanced economies, a main challenge will be to normalize monetary policy," Blanchard added. While some of the expected normalization had be priced in, IMF expect complex capital movements across countries for some time to come.
The report warned that emerging economies with domestic weakness and partly related external current account deficits appear particularly exposed to the potential capital flow reversals.
"In China, the recent rebound highlights that investment remains the key driver in growth dynamics. More progress is required on rebalancing domestic demand from investment to consumption to effectively contain the risks to growth and financial stability from overinvestment," it noted.