IMF sees stronger global growth, low inflation risks

The International Monetary Fund (IMF) said the global economy this year would be stronger than it previously forecast, with few signs of inflation, allowing central banks to keep interest rates low to ensure a sustained expansion.

The Washington-based lender said in a forecast released today that the world economy would expand 3.9 per cent in 2010, compared with its October projection of 3.1 per cent. At the same time, the recovery in industrial nations was expected to be “sluggish,” burdened by high unemployment rates and rising public debt, IMF said.

The forecasts reflect differing stages of recovery across the globe, with emerging economies such as China and India helping pull the world out of the worst recession in six decades, while private demand in Europe, the US and Japan would rebound more slowly. It warned that sustained growth in advanced economies hinged on overhauling oversight of the financial industry and dealing with banks’ impaired assets.

“Many central banks can afford to maintain low interest rates over the coming year,” IMF said in an update to its World Economic Outlook. “Policy makers will also need to move boldly to reform the financial sector with the objectives of reducing the risks of future instability.”

The fund, which rescued countries such as Pakistan and Iceland during the global recession, said fiscal stimulus programmes planned for this year “should be fully implemented”, because one of the risks to growth was “a premature and incoherent exit from supportive policies.”

Advanced economies
Advanced economies would expand 2.1 per cent this year, more than forecast in October, after shrinking 3.2 per cent in 2009, according to IMF. They would grow 2.4 per cent in 2011, down from the 2.5 per cent estimated in October, the fund said.

US gross domestic product would expand 2.7 per cent this year before slowing to 2.4 per cent in 2011, IMF said. In October, the fund expected growth of 1.5 per cent for 2010 in the world’s largest economy.

“The recovery in advanced economies is still expected to be weak by historical standards, with real output remaining below its pre-crisis level until late 2011,” the IMF report said. “In many emerging and developing economies, activity is expected to be relatively vigorous, largely driven by internal demand.”

The euro area is likely to expand 1 per cent this year and 1.6 per cent in 2011, according to the report. The forecast for the UK calls for growth of 1.3 per cent this year and 2.7 per cent in 2011.

UK recovery
The UK economy expanded 0.1 per cent in the fourth quarter, pulling Britain out of its longest recession on record, the Office for National Statistics said today in London. Growth was less than economists forecast.

The outlook for Japan’s economy this year was unchanged from the October estimate of 1.7 per cent expansion.

Emerging and developing economies would grow 6 per cent, a 0.9 percentage point increase from the previous forecasts. Next year, they would expand 6.3 per cent, the fund said.

China’s growth is forecast to accelerate to 10 per cent this year, up from the 9 per cent projected in October, after 8.7 per cent last year. India’s economy would expand by 7.7 per cent in 2010, compared with the October forecast of 6.4 per cent.

Inflation ‘subdued’
Inflation pressures “will remain subdued in most economies” because of excess capacity, the fund said. Also contributing to “well-anchored inflation expectations” was the high level of unemployment, expected to remain “for some time,” it said.

Commodity prices are “expected to rise a bit further, supported by the strength of global demand, especially from emerging economies,” IMF said. The fund’s projection for the price of oil this year was unchanged at $76 a barrel. In 2011, oil would average $82 a barrel.