"The world economy has entered yet another transition. Advanced economies are slowly strengthening, more or less as forecast. At the same time, emerging market economies have slowed down, more so than we had forecast in July," Olivier Blanchard, IMF Economic Counsellor and Director of the Research Department, said.

The latest World Economic Outlook report released by IMF forecast growth in advanced economies to be 1.2 percent this year, 2 percent next year, the same as its previous forecast in July.

"We forecast growth in emerging markets and developing economies to be 4.5 percent this year, 5.1 percent next year, a downward revision of 0.5 percent and 0.4 percent respectively relative to our July forecasts," he said.

"These two evolutions are leading to tensions, with emerging market economies facing both the challenge of slowing growth and changing global financial conditions," Blanchard told reporters at IMF headquarters in Washington.

On the US, he said private demand continues to be strong, and on the assumption that fiscal accidents are avoided (the assumption that underlies our forecast), the recovery should strengthen.

Recovery in Japan continues and core Europe is, at last, showing some signs of recovery, he said, but quickly noted that major news comes from emerging market economies, where growth has declined.

"The obvious question is whether this reflects a cyclical slowdown, or a decrease in potential growth. Based on what we know today, the answer is both. Unusually favorable world conditions, be it strong commodity prices or global financial conditions, led to higher potential growth in the 2000s, with, in a number of countries, a cyclical component on top," he said.

As commodity prices are stabilizing and financial conditions tightening, potential growth is lower, in some cases compounded by a sharp cyclical adjustment, he added.

"Confronted with these changes, governments in emerging market economies face two challenges: Adjust to lower potential growth, and, where needed, deal with the cyclical adjustment," Blanchard said.


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