The International Monetary Fund (IMF) raised its global growth forecast for the first time in more than a year, with the US boosting the outlook while recent improvements remain “very fragile.”
The world economy will expand 3.5 per cent this year, compared with a January projection of 3.3 per cent, the Washington-based IMF said on Tuesday in its World Economic Outlook. It sees growth of 4.1 per cent in 2013, up from four per cent. It raised its forecasts for the US to gains of 2.1 per cent this year and 2.4 per cent in 2013.
The report reflects IMF’s view that the euro area, while still facing an economic downturn and the “hard to quantify” potential risk of a country’s default, has stabilised since last year. The euro area economy is projected to decline by 0.3 per cent this year, an improvement from the 0.5 per cent in IMF’s previous forecast. China is projected to grow 8.2 per cent and Japan two per cent this year.
“For the last six months the world economy has been on what is best described as a roller-coaster,” IMF chief economist Olivier Blanchard said at a briefing in Washington on Tuesday. After European governments took measures to reassure markets, “an uneasy calm remains. One has the feeling that at any moment things could well get very bad again.”
The IMF last raised its quarterly projection for world growth in January 2011, when it increased the forecast to 4.4 per cent for that year from 4.2 per cent. IMF’s projections for the US are below the median forecasts of 2.3 per cent growth this year and 2.5 per cent in 2013.
“Improved activity in the United States during the second half of 2011 and better policies in the euro area in response to its deepening economic crisis have reduced the threat of a sharp global slowdown,” IMF said in a summary of the report. “Weak recovery will likely resume in the major advanced economies, and activity is expected to remain relatively solid in most emerging and developing economies. However, the recent improvements are very fragile.”
“The most immediate concern is still that further escalation of the euro-area crisis will trigger a much more generalised flight from risk,” IMF said. “Geopolitical uncertainty could trigger a sharp increase in oil prices.” A 50 per cent increase in the cost of oil would reduce global output by 1.25 per cent, according to the report.
Oil rose yesterday as the reversal date for the Seaway crude pipeline was moved up, causing the spread between New York-traded futures and Brent in London to narrow. Crude for May delivery gained 10 cents to settle at $102.93 a barrel on the New York Mercantile Exchange. Prices are up 4.1 per cent this year.
As Group of 20 finance ministers and central bank governors prepare to meet this week in Washington, IMF warned that policy makers in Europe “must prevent disorderly and destructive deleveraging of the banking system and to promote an adequate flow of credit to the private sector.”
Advanced economies, which include the US, the euro area, Japan, the UK and Canada, will grow 1.4 per cent this year and two per cent in 2013, the IMF said. Those are up from 1.2 per cent and 1.9 per cent in the January forecasts. So-called emerging and developing economies will expand by 5.7 per cent in 2012 and six per cent next year, up from earlier projections of 5.5 per cent and 5.9 per cent.
The IMF forecast a 1.8 per cent economic contraction in Spain, worse than the 1.6 decline the lender projected in January, according to the report. Spanish Prime Minister Mariano Rajoy said yesterday that the country must slash its budget deficit to maintain access to financing, as bond yields rose to the highest level since his government came to power four months ago.
Italy, where Prime Minister Mario Monti is trying to revamp labour markets to make the economy more competitive, is forecast to contract 1.9 per cent this year, better than the 2.1 per cent slump the IMF had projected in January, the IMF said on Tuesday.
“Some optimism has returned,” Blanchard said in a statement accompanying the report. “It should remain tempered. Even absent another European crisis, most advanced economies still face major brakes on growth. And the risk of another crisis is still very much present and could well affect both advanced and emerging economies.”
European nations should decrease the links between governments and banks, “from the creation of euro level deposit insurance and bank resolution to the introduction of limited forms of Eurobonds, such as the creation of a common euro bill market,” Blanchard said.
On China, the IMF said growth in the world’s second-largest economy had “moderated” since mid-2011, “and there is so far little sign of a sharp correction in the potentially overheated real estate sector and most related activities, despite widespread concerns about a hard landing.”
After 8.2 per cent growth for China this year, the IMF forecasts an 8.8 per cent expansion in 2013.
“The potential consequences of a disorderly default and exit by a euro area member are unpredictable and thus not possible to map into a specific scenario,” the IMF said. “If such an event occurs, it is possible that other euro area economies perceived to have similar risk characteristics would come under severe pressure as well, with a full-blown panic in financial markets and depositor flight from several banking systems.”
On consumer prices, the IMF projects a 1.9 percent increase this year in advanced economies and 1.7 percent in 2013. Those are higher than the 1.6 percent and 1.3 percent the lender forecast in January. In emerging and developing countries, inflation will be 6.2 percent this year and 5.6 percent in 2013.
