The global rebound has picked up steam, but could be in jeopardy unless wealthy countries show more resolve in attacking debt problems, and emerging powerhouses keep their simmering economies from boiling over, the International Monetary Fund warns.
The IMF predicts the world economy will expand 4.4 per cent this year, a slight increase from the 4.2 per cent it forecast in October. The change is the result of a stronger-than-anticipated recovery in the second half of 2010 and the likely effects of U.S. moves to boost the world’s biggest economy. The IMF’s prediction of 4.5 per cent growth in 2012 remains unchanged.
The so-called advanced economies – countries such as the United States, Canada, Japan and much of Europe – will grow 2.5 per cent on average in each of the next two years, a pace too slow to significantly reduce joblessness. That compares with the fund’s October projection of 2.2-per-cent growth in 2011 and 2.6 per cent in 2012.
The world’s emerging economies, meanwhile – such as China, India and Brazil – will expand by an average 6.5 per cent in both years, underscoring their need to keep a lid on things without snuffing out the global recovery they’ve been driving.
“The two-speed recovery continues,” the Washington-based IMF said Tuesday in an update to its World Economic Outlook. “In advanced economies, activity has moderated less than expected, but growth remains subdued, unemployment is still high, and renewed stresses in the euro area periphery are contributing to downside risks. In many emerging economies, activity remains buoyant, inflation pressures are emerging, and there are now some signs of overheating.”
The IMF’s new forecast is a reminder that the leaders of the Group of 20 major economies have a long way to go before their repeated pledges to map out a “strong, balanced and sustained world recovery” are fulfilled. The necessary shifts in demand around the globe – the United States needs to export more, for instance; governments as well as households in advanced nations must learn to live within their means; and countries such as China need to import more and save less – are happening slowly, as are efforts to bolster banks’ abilities to withstand economic shocks.
At the same time, inflation has become a serious issue in some emerging markets, requiring policy makers to try to slow the flows of capital rushing into their economies – steps that could sharply curb growth and demand for commodities if they’re not implemented carefully. In addition, many countries’ freelance experiments with capital controls have included efforts to keep their currencies from appreciating, reinforcing an obstacle in the way of a balanced global economy.
“Downside risks to the recovery remain elevated,” the IMF said, pointing to the need for financial reform in advanced economies, action on euro zone troubles, and policies to keep inflation in check in key emerging economies.
The outlook for the United States is a case in point.
The IMF raised its estimate for U.S. economic growth in 2010 to 2.8 per cent from its October forecast of 2.6 per cent, and to 3 per cent for 2011 from 2.3 per cent. The 2011 upgrade was the biggest revision in the fund’s forecasts, owing in large part to the combined effects of the tax-cut package President Barack Obama and Republicans in Congress agreed to late last year and the U.S. Federal Reserve’s controversial asset-purchase program.
However, the IMF listed as downside risks “continued weakness” in the U.S. real estate market, and a lack of progress in controlling budget shortfalls that could deter bond investors.
The IMF’s projections for the troubled euro area were virtually unchanged from October, but that largely reflects the strength and outsized influence of Germany’s economy. As well, “current policy actions manage to keep the financial turmoil and its real effects contained in the periphery of the euro area, resulting in only a modest drag on the global recovery.”
However, in its related Global Financial Stability Report, the IMF warned the stability of the global financial system is “still not assured” and “significant policy challenges remain.” Moreover, the IMF said, several European countries and their central banks face “substantial funding needs” this year.
Canada’s economy will grow 2.3 per cent this year after expanding 2.9 per cent in 2010, the IMF said in December after its latest country review. The 2011 projection for Canada’s “gradual” recovery was a markdown from the IMF’s previous forecast of 2.7 per cent growth, and the fund also added its voice to the chorus of policy makers warning that Canada’s household debt burden represents a significant threat to the country’s economic recovery.
