World recovery continues but risks increase, says IMF


By Oluwaseyi Bangudu July 19, 2010 01:55AM

Balancing the strong growth numbers for the first half of 2010 and the adverse impact of increased financial turbulence, the International Monetary Fund (IMF) forecasts world growth to rise to 4 per cent this year, before falling somewhat to 4 per cent in 2011 - with the world average masking large differences around the globe.

But despite the stronger than expected first half recovery, the IMF warned that uncertainties surrounding sovereign and financial sector risks in parts of the euro area could spread more widely, posing difficulties for both financial stability and the economic outlook.

“While we predict the recovery will continue, it is clear that downside risks have risen sharply,” Olivier Blanchard, the IMF’s chief economist, stated in a report, adding that Blanchard and José Viñals, respectively the Fund’s Economic and Financial Counselors, launched updates to the IMF’s World Economic Outlook (WEO) and Global Financial Stability (GFSR) in Hong Kong for the first time.

The IMF said as always, these world growth rates hide a large difference between and within advanced and emerging and developing economies, with the United States expected to grow at about 3 per cent in 2010, the euro area at 1 per cent, Japan at close to 2 per cent, and emerging and developing economies averaging about 6 per cent.

“The overall numbers do not reveal an important difference between the first and the second half of this year. For advanced countries for example, growth in the first half is forecast to be 3 per cent, while growth in the second half of the year is forecast to be only 2 per cent, reflecting a slowdown in private demand growth” the report stated.

Spotlight on policy implementation

In its market update to the GFSR, the IMF points to restoring progress toward financial stability to contain the risks and keep the economic recovery on track. Rapid implementation of stabilisation measures taken by the euro area government authorities will be a key component in calming financial markets.

“Supported by accommodative monetary conditions, fiscal actions should be complemented by financial sector reform and structural reforms to enhance growth and competitiveness,” the WEO update said. “Policies in emerging economies should also help rebalance global demand, including through structural reforms and, in some cases, greater exchange rate flexibility.” “While we remain cautiously optimistic about the pace of recovery, there are clearly dangers ahead,” Mr. Blanchard said. “How Europe deals with fiscal and financial problems, how advanced countries proceed with fiscal consolidation, and how emerging market countries rebalance their economies, will determine the outcome.” The IMF forecast said Asia’s strong recovery from the global financial crisis continued in the first half of 2010, despite renewed tension in global financial markets. GDP results for the first quarter were generally stronger than anticipated at the time of the last forecast made in April 2010, and high-frequency indicators suggest that economic activity remained brisk during the second quarter.

Along with the rest of Asia, Korea, which is taking over leadership of the Group of Twenty (G-20) industrialised and emerging market countries this year, has staged an impressive recovery from the global crisis and is expected to grow 5 per cent this year, according to the IMF.

Risks on the rise

Both the WEO and GFSR updates said that risks have risen markedly. In the near term, the main risk is an escalation of financial stress and contagion, prompted by rising concern over sovereign risk. “This could lead to additional increases in funding costs and weaker bank balance sheets, and hence to tighter lending conditions, declining business and consumer confidence, and abrupt changes in exchange rates,” the IMF report stated.

Because of this uncertain backdrop, the organisation said the overarching policy challenge is to restore financial market confidence without choking the recovery.The update also calls for greater clarity on the details and timing of intended regulatory reforms, as uncertainty surrounding a final set of reforms is making it difficult for banks to take business decisions and constraining their willingness to lend.

Policies should be determined by country circumstances, the IMF said. Most advanced economies do not need to tighten before 2011 because tightening sooner could undermine the fledgling recovery, but they should not stimulate their economies more.

At a global level, the IMF said policies should focus on implementing credible plans to lower fiscal deficits over the medium term while maintaining supportive monetary conditions, accelerating financial sector reform, and rebalancing global demand.


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