The International Monetary Fund (IMF) yesterday (Tuesday) raised its 2011 global economic forecast based on strong growth in emerging markets and stronger U.S. output fueled by tax-cut extensions.
The world economy will expand by 4.4%, more than the 4.2% the IMF projected in October, while growth in 2012 is expected to be 4.5%, unchanged from October, the agency said in an update to its World Economic Outlook report.
But even though the world's economies continue to recover, stubborn unemployment in developed countries, along with risks posed by sovereign debt and the financial sector in Europe, could threaten global stability, the IMF said.
"The world economy is recovering, but it is a two-speed recovery," IMF chief economist Olivier Blanchard said in comments posted on the fund's website. "Our forecast is that next year growth will be roughly the same as this year. That's not going to be able to make a big dent to unemployment."
Advanced economies are still struggling to move past the recent financial crisis, while growing emerging economies are showing signs of overheating and inflationary pressures, the report suggested.
While a faster-than-expected second half of 2010 helped put the world on stronger footing, the IMF warned that risks to its predictions remain "elevated."
The fragile state of the economic recovery was underscored yesterday when Great Britain reported its economy shrank for the first time in more than a year during the fourth quarter of 2010.
The Office of National Statistics said gross domestic product (GDP) fell 0.5% between October and December after expanding by 0.7% in the third quarter. It is the first quarterly contraction in GDP since the third quarter of 2009.
While some politicians blamed the slowdown on snowy weather, the news was seen as a surprise negative hit that will trigger debate about the country's aggressive fiscal tightening and the future direction of interest rates.
"Even allowing for a very substantial hit to economic activity from December's severe weather, contraction of 0.5% quarter-on-quarter … is extremely disappointing and worrying," Howard Archer, chief European and U.K. economist at IHS Global Insight told Bloomberg News.
The biggest dangers to the recovery are centered in Europe, the IMF said. Euro- region governments need to formulate a comprehensive plan to prevent sovereign-debt "financial stresses" from spreading out to other countries and develop stress tests of the region's banks to prevent further turbulence.
The financial bailouts of Greece and Ireland, as well as swollen budget deficits in other countries, increase the potential for more aid and will continue to hurt market confidence in the region, the IMF said.
"In particular, continued market pressures could result in serious funding pressures for major banks and sovereigns, increasing the likelihood that problems spill over to core countries," the report said.
Besides the problems in Europe, the IMF said it is also concerned by efforts to slow down regulatory reform of the financial-services industry, as well as the ability of emerging-market economies to deal with an increase in capital inflows.
Emerging countries were urged to consider a range of policy options - including currency appreciation - to prevent any asset-price or credit bubbles as inflation pressures gain momentum.
"Policymakers will need to be attentive and act in a timely manner when pressures from inflows are building up," the report said, acknowledging that capital controls and other measures might be necessary.
In a separate report, the IMF said that financial conditions have improved, with equity markets and commodity prices rising.
The fund today also raised its 2010 global growth estimate to 5%, the fastest pace since 2007, from 4.8% in October.
The IMF's estimates are more optimistic than the median estimate of economists surveyed by Bloomberg this month, who expect global growth of 4.2% this year.
Despite a slowdown from 2010, China and India are expected to be among the fastest-growing emerging economies, according to the IMF. The fund left its forecast for both unchanged, with China expected to register growth of 9.6% and India's outlook at 8.4%.
For the U.S. economy, the report said the U.S. Federal Reserve's continued efforts to stimulate the economy "are justifiable at this juncture" in light of unemployment and the housing market, while monetary policy should continue to be accommodative as long as inflation remains in check.
Eventually, however, the United States needs to start work on a plan to deal with its fiscal situation, especially its government spending and budget deficits.
"The absence of a credible, medium-term fiscal strategy would eventually drive up U.S. interest rates, which could prove disruptive for global financial markets and for the world economy," the fund said.
When U.S. fourth-quarter GDP numbers are released on Friday, they are expected to be supported by consumer spending which rose at an annual pace of 4%, the largest increase in four years.
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