World economic recovery faster than expected – IMF

ISTANBUL, Turkey — The International Monetary Fund (IMF) said Thursday that the global economy is recovering faster than expected — but warned governments against premature withdrawal of stimulus efforts.

The positive report card was likely to feed a cautious but widespread relief that — despite continuing unemployment woes and halting efforts to improve regulation of financial markets — the downturn is easing and may prove less devastating than initially feared.

According to the twice-yearly World Economic Outlook, the world is poised to grow by 3.1 percent in 2010 with much of the recovery driven by emerging economies such as China and India. That is up from the 2.5 percent in the IMF’s previous set of estimates. And for 2009, the IMF now finds a 1.1 percent decline of global GDP instead of the 1.4 percent contraction it predicted in July.

But it warned against premature withdrawal of stimulus efforts and said uncertain growth in the developed world could soon put governments in a vise — between keeping their stimulus spending going, or cutting it back to avoid ruining their finances with debt and deficits.

The IMF said economic growth has turned positive — France, Germany and Japan are already officially out of recession — as concerted efforts by governments and central banks around the world have boosted demand and helped ease fears of total collapse of the world’s financial system. Banks have been bailed out, economies stimulated with deficit spending, and interest rates sharply reduced.

“The triggers for this rebound are strong public policies across advanced and emerging economies that, together with measures deployed by the IMF at the international level, have allayed concerns about systemic financial collapse, supported demand, and all but eliminated fears of a global depression,” Olivier Blanchard, the IMF’s economic counselor and Jose Vinals, the fund’s financial controller, said in a joint forward to the new outlook.

Despite a more optimistic scenario, the IMF said growth next year is still way below the levels before the financial crisis exploded around a year ago. It warned that there were still risks its forecast was too optimistic.

The IMF said the main risk to the world economy was the possibility of weak demand in the advanced economies, which includes the United States, Western Europe and Japan.

As a result, it warned that governments may be faced with either maintaining their fiscal stimulus packages, which would raise questions about the sustainability of government debt levels, or phasing out those measures — which could prompt a further downturn and more problems in the financial sector.

In the best case, reduced fears about a 1930s-style crash and an accompanying strong rebound in financial market sentiment could drive a larger-than-projected short-term increase in consumption and investment.

Regarding the banking sector, the IMF said policymakers have to make sure that markets and the banks support the economic recovery and that reforms are put in place to prevent a similar crisis in the future.

It also said that achieving sustained healthy growth over the medium term will also depend on rebalancing the pattern of global demand. Specifically, the IMF said countries running massive trade surpluses based on export-led growth strategies will need to find a way to deal with likely subdued domestic demand in import-heavy economies which have experienced stock and housing market busts that reduce their purchasing power.

That effectively means that countries like China, Germany and Japan will have to live with lower consumption levels in the US, which has been living beyond its means on credit and as the relatively weak Chinese yuan, has made the price of imported goods cheap.

In general, however, the IMF was more optimistic for both the advanced economies and the developing world.

For the US, the world’s largest economy, the IMF raised its 2010 growth forecast by 0.7 percentage point to 1.5 percent, following an anticipated 2.7 percent contraction in 2009.