The International Monetary Fund raised its forecast for global growth this year led by China and cautioned that a failure of nations to contain soaring public debt might have “severe” consequences for the world economy.
The IMF yesterday said the global economy will expand 4.2 percent in 2010, the fastest pace since 2007, compared with a January forecast of 3.9 percent. Emerging nations including China and India are leading the world out of its worst recession since World War II, with Europe and Japan trailing the U.S. among advanced economies, the fund said in its World Economic Outlook.
After governments spent trillions of dollars to revive growth, the IMF said the challenge facing policy makers gathering in Washington this week is debt near postwar records. The richest nations face growing pressure from investors to draft plans to reduce budget deficits, while emerging economies try to fuel domestic demand and avoid asset bubbles amid a surge of foreign investment.
“The global recovery has evolved better than expected, but in many economies the strength of the rebound has been moderate given the severity of the recession,” the IMF said. “Activity remains dependent on highly accommodative macroeconomic policies and is subject to downside risks, as fiscal fragilities have come to the fore.”
Finance ministers from the Group of Seven industrial nations meet later today in the U.S. capital. Tomorrow, finance ministers and central bankers from the Group of 20 developed and emerging economies meet to debate how and when to remove fiscal and monetary stimulus as the global expansion strengthens.
G-20 Members
The G-20 accounts for about 85 percent of global gross domestic product. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.
The G-20 also is weighing proposals to have banks shoulder the costs of rescuing the financial industry after governments provided an estimated $11 trillion to institutions including New York-based Citigroup Inc. and Edinburgh-based Royal Bank of Scotland Group Plc.
The world economy contracted 0.6 percent in 2009, less than the 0.8 percent projected in January, said the Washington-based IMF, which expects expansion of 4.3 percent in 2011.
Olivier Blanchard, the IMF’s chief economist, said yesterday the rebound is “firming up, but it is what we call a multi-speed recovery” with “very slowly decreasing unemployment.”
‘Debt Explosion’
As rising deficits bring some countries to the verge of a “debt explosion,” realigning budgets will be “easy in some countries, harder in others,” he said.
This year, advanced economies including the U.S., Germany and Japan will grow 2.3 percent, more than the 2.1 percent forecast in January, with unemployment forecast to stay close to 9 percent through 2011. The expansion in advanced nations will reach 2.4 percent next year, the fund said.
Emerging and developing economies including Brazil and Russia will grow 6.3 percent this year, a 0.3 percentage point increase from the previous forecast. Next year they will expand 6.5 percent, the fund said.
“Economies that are off to a strong start are likely to remain in the lead, as growth in others is held back by lasting damages to financial sectors and household balance sheets,” the IMF said.
U.S. Growth
U.S. GDP will expand 3.1 percent this year before slowing to 2.6 percent in 2011, the IMF said. In January the fund expected growth of 2.7 percent for 2010 in the world’s largest economy.
The euro area is likely to expand 1 percent this year, unchanged from the January projection, and 1.5 percent in 2011, according to the report. The IMF forecast U.K. growth of 1.3 percent this year and 2.5 percent in 2011.
The outlook for Japan’s economy this year was raised to a 1.9 percent expansion, up from 1.7 percent predicted four months ago. The Canadian economy was forecast to increase 3.1 percent this year, from a 2.6 percent growth outlook in January, the IMF said.
China’s growth is forecast to accelerate to 10 percent this year, unchanged from the January projection, after 8.7 percent growth last year. India’s economy will expand by 8.8 percent in 2010, 1.1 points higher than the IMF’s forecast in January.
Central banks can keep monetary policy accommodative in wealthy countries because inflation expectations are “well anchored,” the IMF said. The fund also said oil prices would likely average $80 a barrel this year and $83 a barrel next year.
‘Credible’ Plans
With public debt on a path to exceed 100 percent of GDP in 2014 in advanced economies, many nations need to “urgently adopt credible medium-term strategies to contain public debt and later bring it down to more prudent levels,” the IMF said.
Still, the fragility of the recovery justifies keeping the fiscal support is place this year, except for countries with high risk premiums that must start cutting their deficits now, the IMF recommended.
Greece’s struggle to finance a budget shortfall of 12.9 percent of its GDP has undermined the credibility of Europe’s monetary union; the euro has declined against the dollar for the past four months.
The Greek fiscal crisis pushed countries sharing the euro earlier this month to craft a bailout plan in which they would put up as much as 30 billion euros ($40.2 billion) this year, with the IMF also contributing.
Greece Talks
The IMF’s mission in Athens this week “is collecting numbers and we’ll put in place a program over the coming days, the coming weeks,” Blanchard said in an interview yesterday with Bloomberg Television. “It’s clear that the situation in Greece is a serious one -- now the question is what is the best adjustment path for them to follow.”
In emerging Asia, some countries can afford to maintain fiscal stimulus but “these economies will need to be alert to growing price pressures and emerging financial instability and to allow their currencies to appreciate to combat overheating,” according to the IMF.
While some Asian economies have been watchful of rising property prices, including steps to rein in domestic credit growth, the IMF saw “limited” evidence for “broader asset price overvaluation.”
Exchange Rates
The recovery of cross-border flows has led to changes in real effective exchange rates, the IMF said. Still “currencies of a number of emerging Asian economies remain undervalued, substantially” in the case of China’s yuan, it said. The dollar and the euro “remain on the strong side relative to medium-term fundamentals.”
In the interview yesterday, Blanchard said China’s growth pace has been a “very healthy one” and “we’re not terribly worried about a major asset bubble in China.”
As China pursues policies that increase domestic savings and consumption, “it will be in their interest to actually allow for the appreciation of their currency in order to reallocate resources towards the domestic sector.” That process may play out “over the next few years,” he said.
Source: Bloomberg