IMF Raises Forecast for Global Growth, Sees Multispeed Recovery

The International Monetary Fund (IMF) says the world economy is recovering from the global crisis better than expected, but sees activity reviving at different speeds in different parts of the world.

 

In its latest World Economic Outlook (WEO), the IMF notes that among the advanced economies, the U.S. is off to a better start than Europe and Japan. 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.

 

China’s growth is forecast at 10% in 2010, with India also at a rapid 8.8%. Sub-Saharan Africa has weathered the crisis well and its recovery is expected to be stronger than in previous global downturns. In the depth of the crisis last year, world economic activity contracted by 0.6% as world trade slumped and credit froze up.

 

“We find ourselves at an important new stage of the crisis,” IMF Research Department Director Olivier Blanchard told an April 21 news briefing in Washington. “A global depression has been averted. The world economy is recovering, and recovering better than we had previously thought likely.” But he added that achieving strong, sustained, and balanced growth would require more work, namely fiscal consolidation in advanced countries, exchange rate adjustments, and a rebalancing of demand across the world.

 

The Wall Street Journal reports that the semi-annual WEO stresses the IMF's view that the Chinese yuan is "substantially" undervalued. Quoting Blanchard, the Journal says that allowing the yuan to strengthen would help Beijing shift to more domestic-led growth and reduce the chances that the economy would overheat. "An appreciation of the currency, appears highly desirable on its own," Blanchard told the newspaper.

 

Outlook Still Uncertain

 

The IMF report says that despite improvements, the outlook remains unusually uncertain, and downside risks stemming from fiscal fragilities have come to the fore. A key concern is that room for policy maneuvers in many advanced economies has either been exhausted or become much more limited. Moreover, sovereign risks in advanced economies could undermine financial stability gains and extend the crisis. The rapid increase in public debt and deterioration of fiscal balance sheets could be transmitted back to banking systems or across borders.

 

These problems underscore the need for policy action to sustain the recovery of the global economy and financial system. Given the still fragile recovery, fiscal stimulus planned for 2010 should be fully implemented, except in economies that face large increases in risk premiums.

 

The report said the policy agenda should include several important elements, such as reducing sovereign risk; unwinding the stimulus; combating unemployment; and buttressing financial stability.
 

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