IMF senior official: Decline in world economy moderating

BODRUM, Turkey (Reuters) –The International Monetary Fund is likely to revise up its 2010 growth forecast for the world economy with signs that the rate of decline in global output has moderated, a senior IMF official said on Friday.

Addressing a Turkish business conference in this southern town, IMF First Deputy Managing Director John Lipsky, however, warned that it was far too early to declare victory, with financial conditions far from normal and the world economy still in recession.

“While the latest data point to a slowing of the global contraction, there is still great uncertainty regarding the timing and pace of economic recovery,” Lipsky said in prepared remarks to the Turkish Industrialists’ and Businessmen’s Association.

The IMF is scheduled to present updated forecasts for the world economy on July 7 in Washington. During its previous forecast in April, the Fund projected the world economy would contract 1.3 percent this year in the deepest post-World War Two recession and rebound to grow at 1.9 percent next year.

Lipsky said the recovery next year will be sluggish, with activity in the world’s advanced economies likely to revive only gradually weighed down by financial deleveraging, restrained credit growth and weak household income growth.

Meanwhile, emerging markets will be unable to return to trend growth while advanced economies are still underperforming, he added.

“As a result, output gaps and unemployment rates in most economies should continue rising through 2010,” Lipsky warned.

He emphasized that policies need to focus on a sustained recovery, starting with reviving the financial sector.

So far, progress overall in nursing banks back to health had been slow and uneven, while little had been done to resolve the problem of toxic assets on banks’ balance sheets.

“In order to lay the ground for a revival of bank credit growth, the near-term focus of policies should continue to be on restructuring weakened financial institutions by cleansing banks’ balance sheets of impaired assets, assessing bank viability, and ensuring bank recapitalization where needed,” he said.

In addition, fiscal policy in advanced economies and in many emerging market countries should remain expansionary at least through 2010, and additional stimulus may become necessary, Lipsky said. Meanwhile, monetary policy should remain supportive until a sustained recovery takes hold, he added.

But Lipsky also said that widening fiscal deficits in many industrial countries were a growing serious concern, especially with government costs expected to rise due to population ageing and more people needing healthcare.

Still, even as policies are focused on ending the recession, authorities should start planning exit strategies, especially the extraordinary government intervention in the financial sector, he said.

Central banks will need to devise plans to exit from unconventional measures and forestall concerns that inflation pressures could be allowed to rise, Lipsky added.