GLOBAL ECONOMY GROWING: IMF observes

BACK ON TRACK IS IT?

The global economy is expanding again and financial conditions have improved significantly, the International Monetary Fund (IMF) has said.

But in its latest World Economic Outlook, the IMF said the “pace of recovery is expected to be slow”. It added that the recovery is likely to be “insufficient to decrease unemployment for quite some time”. On Wednesday, the IMF cut its forecast for the amount that banks are likely to lose in bad loans and investments.

The total it expects banks to lose between 2007 and 2010 is now $3.4tn (£2.1tn), down from its previous estimate of $4tn. This reduction is a direct result of the improved outlook for the global economy.

Separately, the head of the European Central Bank (ECB) said that the 16 countries in the eurozone should withdraw stimulus packages in the next two years . “From an ECB point of view, it is important to do what is necessary to exit as soon as possible,” Jean-Claude Trichet said at a meeting of EU finance ministers and central bank governors in Gothenburg.
“It is important in our view that it starts as soon as the recovery starts. It is something which is essential for the recovery itself. “I would say, in our own view, at the latest in 2011.”
After a year of being downbeat about prospects for the world economy, the IMF’s latest World Economic Outlook declared the global recession is ending.

“The global economy appears to be expanding again, pulled up by the strong performance of Asian economies, and stabilization or modest recovery elsewhere,” the IMF said.

The Fund said it now expects the world economy to contract by 1.1% in 2009 before growing by 3.1% in 2010. This is more upbeat than its last update in July when the Fund projected the world economy would shrink 1.4% in 2009, before expanding 2.5% in 2010.

Over the four years starting at the end of 2010, global growth is expected to average a little more than 4% a year, below the 5% growth rates before the financial crisis erupted, the IMF report said.

While advanced economies will contract this year, they will begin a fragile recovery in 2010, the report said. Both the United States and euro-area will post growth, albeit at a tepid pace, next year, it added.

Spain will be the only euro-area member whose economy will contract next year, the IMF said, adding that the pace of the economic decline in Europe has started to moderate.

In contrast, emerging and developing economies are further ahead in the recovery and will expand by 1.5% this year before rebounding 5% next year led by China and India, it said, also noting signs of stabilization in Latin America.

Despite the improved outlook, however, the fund said there were a number of risks to the recovery. It cited major government stimulus packages, central bank support and restocking by companies that have run down inventories as three temporary factors that “will diminish during the course of 2010″.

It also highlighted the fact that banks are being forced to hold more cash in reserve, which will limit the amount of credit available “for the remainder of 2009 and into 2010″. With less money available to companies and individuals to borrow, and therefore invest, demand may be stifled.
Most serious, it concluded, was the fact that “private demand in advanced economies remains very weak”.