IMF sees stronger but still fragile global recovery

WASHINGTON (AFP) – The International Monetary Fund said Tuesday the global economy is rebounding better than anticipated after two years of crisis but warned the recovery remains fragile and fraught with risks.

The IMF projected global growth of 3.9 percent in 2010, bouncing back from a 0.8 percent contraction in 2009 that marked the first downturn since World War II.

The 2010 growth forecast was a solid 0.8 percentage points higher than the 3.1 percent estimated four months ago, as a “multispeed recovery” showed sluggish growth in advanced economies offset by “relatively vigorous” growth in emerging and developing economies.

“The global recovery is off to a stronger start than anticipated earlier but is proceeding at different speeds in the various regions,” it said in an update of its twice-yearly World Economic Outlook report published on October 1.

The recovery in gross domestic product (GDP), or goods and services output, was driven by public stimulus and other support measures.

“For the moment, the recovery is very much based on policy decisions and policy actions. The question is when does private demand come and take over?” said IMF chief economist Olivier Blanchard.

Dominique Strauss-Kahn, the IMF managing director, has repeatedly warned countries against premature exits from anti-crisis measures, saying they risk a return to recession.

The United States, the world’s largest economy, was expected to post GDP growth of 2.7 percent in 2010, a sharp 1.2 percent increase from the prior forecast.

China, the emerging market leader and massive engine of the global recovery, will see growth accelerate to 10.0 percent this year, a full 1.0 percent higher than previously estimated.

The IMF held unchanged its growth forecast for Japan, saying the second-largest economy would expand at 1.7 percent.

The 16-nation eurozone’s GDP was set to expand 1.0 percent, up from the prior 0.3 percent estimate.

Advanced economies overall would grow by 2.1 percent, much slower than the 6.0 percent pace seen for the emerging and developing economies.

Global production and trade bounced back in the second half of 2009, and “confidence rebounded strongly on both the financial and real fronts, as extraordinary policy support forestalled another Great Depression,” the Washington-based institution said.

An “extraordinary” amount of policy stimulus was driving the global recovery, the IMF said, noting there were still few signs that private demand not stimulated by governments was taking hold, “at least in advanced economies.

Big risks remain to the recovery, including high unemployment, the 186-member institution said.

“A key risk is that a premature and incoherent exit from supportive policies may undermine global growth and its rebalancing,” it said.

The IMF also cited risks to economic stability from high public deficits and debt as countries eventually exit from emergency support programs.

“High fiscal deficits and debt are raising concerns about sustainability and sovereign risk — which is the primary consideration in many countries.”

Among the other considerations authorities should take into account are low interest rates “that might be contributing to asset price bubbles.”

“Crucially, there remains a pressing need to continue repairing the financial sector in advanced and the hardest-hit emerging economies.”

The IMF called for a gradual unwinding of financial sector support measures and for policymakers to “move boldly” to reform the financial sector that is at the heart of the global downturn.

Policymakers should work toward the “objectives of reducing the risks of future instability and rethinking how the potential fallout of financial crises would be borne in the future, while at the same time making the sector more effective and resilient.”

In a separate update of its Global Financial Stability Report, the IMF said: “The repair of the financial system is far from complete.”

“Even though some bank capital has been raised, substantial additional capital may be needed to support the recovery of credit and sustain economic growth under expected new Basel capital adequacy standards,” it said.

“Despite improvements, financial stability remains fragile in many advanced countries and some hard-hit emerging market countries.”