Global recovery stronger than expected as outlook remains unusually uncertain

08:41, April 22, 2010      

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The International Monetary Fund (IMF) said on Wednesday that the global recovery is stronger than expected and world output is projected to rise by 4.25 percent this year, but it also warned the outlook remains unusually uncertain, even though a variety of risks have receded.

"The global recovery has evolved better than expected, with activity recovering at varying speeds, tepidly in many advanced economies but solidly in most emerging and developing economies," said the IMF in its latest World Economic Outlook report.


According to the report, the world economy, which declined by 0. 6 percent in 2009, will recover gradually in 2010 and 2011, growing by 4.2 percent and 4.3 percent respectively.

"Economies that are off to a strong start are likely to remain in the lead, as growth in others is held back by lasting damage to financial sectors and household balance sheets," said the report.

The advanced economies are expected to expand by 2.3 percent this year, and by 2.4 percent in 2011, following a decline in output of more than 3 percent in 2009.

Growth in emerging and developing economies is projected to be over 6.3 percent and 6.5 in 2011, following a modest 2.4-percent gain in 2009.

"Among the advanced economies, the United States is off to a better start than Europe and Japan," said IMF Chief Economist Oliver Blanchard. "Among emerging and developing economies, emerging Asia is leading the recovery, while many emerging European and some Commonwealth of Independent States economies are lagging behind."

The economic growth in the United States, which has been at the center of the global financial storm, is projected to accelerate to 3.1 percent this year and 2.6 percent in 2011, following a decline of 2.4 percent in 2009.

Among the hardest hit during the global crisis, Europe is coming out of recession at a slower pace than other regions.

The eurozone economy will grow by 1.0 percent this year and 1.5 in 2011, the IMF said, criticizing the bloc for sizable fiscal and current account imbalances.

In Japan, the IMF expects the output to rise by 1.9 percent this year and 2.0 in 2010, much better the decline of 5.2 percent in 2009.

In both China and India, strong domestic demand will support the recovery, according to the IMF.

In China, GDP growth exceeded the government's 8-percent target in 2009 and is expected to be close to 10 percent in both 2010 and 2011.

"What has been so far mainly a publicly driven growth path, built on infrastructure investment, is expected to turn toward stronger private consumption and investment," said the IMF report.

In India, growth is projected to be 8.8 percent in 2010 and 8.4 percent in 2011, supported by rising private demand.

In this country, "consumption will strengthen as the labor market improves, and investment is expected to be boosted by strong profitability, rising business confidence, and favorable financing conditions," said the IMF.


But the IMF also warned that the outlook for the world economy remains unusually uncertain, even though a variety of risks have receded.

"Risks are generally to the downside, with those related to public debt growth in advanced economies having become sharply more evident," said the IMF in the report.

In the near term, a risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown and contagious sovereign debt crisis, it said.

More generally, the main concern is that room for policy maneuver in many advanced economies has either been largely exhausted or is much more limited, leaving the fragile recoveries exposed to new shocks.

"In addition, bank exposures to real estate continue to pose downside risks, mainly in the United States and parts of Europe," said the report.

In its semi-annual Global Financial Stability Report (GFSR), which was released on Tuesday, the IMF said the health of the global financial system has improved as the economic recovery has gained steam, but stability risks remain elevated.

"Improving economic and financial market conditions have reduced banks' expected writedowns from 2.8 trillion to 2.3 trillion U.S. dollars, and bank capital positions have improved substantially," the report said. "But some segments of country banking systems remain poorly capitalized and still face significant downside risks."


In the World Economic Outlook, the IMF called for its members to take balanced policies to sustain and strengthen recovery.

"Given the large amount of public debt that has been accumulated during this recession, in many advanced economies exit policies need to emphasize fiscal consolidation and financial sector repair," said the report.

The move will allow monetary policy to remain accommodative without leading to inflation pressure or financial market instabilities.

In emerging and developing economies, priorities depend on room available for fiscal policy maneuvers and on current account positions, said the IMF.

Spillovers related to fiscal policies are particularly relevant for the major advanced economies, as large deficits and the lack of well-specified medium-term fiscal consolidation strategies in these economies could adversely affect funding costs of other advanced or emerging economies, it warned.

Thus, the IMF said that medium-term fiscal consolidation strategies are "urgently needed."

"Regarding the near term, given the fragile recovery, fiscal stimulus planned for 2010 should be fully implemented, except in countries that are suffering large increases in risk premiums, these countries need to begin fiscal consolidation now," said the report.

Looking further ahead, if macroeconomic developments proceed as expected, most advanced economies should embark on significant fiscal consolidation in 2011.

"Countries urgently need to design and implement credible fiscal adjustment strategies, emphasizing measures that support potential growth," said the IMF. "These should include clear timelines to bring down gross debt-to-GDP ratios over the medium term."

"Also needed are reforms to entitlement spending that lower spending in the future but do not depress demand today," it added.



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