IMF raises global growth forecast

WASHINGTON—The International Monetary Fund (IMF) raised its forecast for global growth this year, reflecting a stronger-than-expected first half, while warning that financial- market turmoil has increased the risks to the recovery.

The world economy will expand 4.6 percent in 2010, the biggest gain since 2007, compared with an April projection of 4.2 percent, the Washington-based fund said in revisions to its World Economic Outlook on Wednesday. Growth next year is projected to be 4.3 percent, unchanged from the April forecast.

Canada and the US are leading advanced economies out of the worst recession since World War II, trailed by euro-area countries that need additional measures to boost confidence in their banks, the fund said. Faster expansions in Brazil, China and India are helping to protect the global recovery as a sovereign-debt crisis weighs on Europe, the IMF said.

“The overarching policy challenge is to restore financial- market confidence without choking the recovery,” the IMF report said. “The new forecasts hinge on implementation of policies to rebuild confidence and stability, particularly in the euro area.”

The euro has fallen against the dollar in each of the past seven months on concern countries including Greece and Spain might default on their debt. The MSCI AC World Index of stocks has dropped for three straight months, and the Markit iTraxx SovX Western Europe Index of default swaps insuring against losses on debt of 15 governments last month reached an all-time high.

“Recent turbulence in financial markets—reflecting a drop in confidence about fiscal sustainability, policy responses, and future growth prospects—has cast a cloud over the outlook,” the IMF report said.

While there’s “little evidence of negative spillovers” from the financial stress, some countries are facing “high levels of public debt, unemployment, and in some cases, constrained bank lending,” the report said.

The IMF urged governments to commit to implementing “credible” plans to lower their deficits over the medium term, including the adoption of binding, multiyear targets. Still, the developed economies don’t need to start fiscal tightening before 2011, it said.

The IMF predicted growth of 2.6 percent this year in advanced economies, more than the 2.3 percent seen in April. The fund cut its 2011 growth forecasts for every Group of Seven industrial nation except the US.

The US economy will expand 3.3 percent this year, more than the 3.1 percent predicted in April, and 2.9 percent next year, the IMF said.

Japan’s gross domestic product will increase 2.4 percent in 2010, more than the 1.9-percent forecast in April, before slowing to 1.8-percent growth next year, the fund said.

For the euro area, the IMF kept its forecast for 2010 unchanged at 1 percent and reduced its 2011 outlook 0.2 percentage point to 1.3 percent.

Europe’s debt crisis, which policymakers sought to contain with an emergency €750 billion ($949 billion) aid program, prompted Group of 20 leaders last month to commit to deficit-and debt-reduction goals over the next six years.

Advanced G-20 economies will try to halve deficits by 2013 and start to stabilize their debt-to-output ratios by 2016, leaders said at the end of their June meeting in Toronto. At the same time, they said nations can move at their own pace and pledged to fulfill existing stimulus plans.

Monetary policy in advanced economies can remain “highly accommodative for the foreseeable future,” because inflation is expected to remain “subdued,” helping mitigate the effects of fiscal consolidation on growth, the IMF said in the report.

If risks materialized in economies with central bank policy rates close to zero, officials may need to expand their balance sheets again to ease monetary conditions, it said.

The growth forecast for emerging markets was raised to 6.8 percent, from 6.3 percent in April, the IMF said. The fastest growth rate will be China’s 10.5 percent, followed by India’s 9.4 percent and Brazil’s 7.1 percent, the fund said. Growth forecasts for 2010 in all three of those countries and Russia—the four known as the BRIC nations—were increased. Brazil’s forecast had the biggest revision higher in the report, to 7.1 percent this year, from a 5.5 percent prediction in April, the IMF report showed. Mexico’s economy will increase 4.5 percent this year, more than the 4.2-percent expansion seen in April, the IMF said.

Monetary policy requirements vary in emerging economies, where inflation is expected to accelerate to 6.25 percent this year before slowing to 5 percent in 2011, the IMF said.

(Bloomberg News)