The International Monetary Fund (IMF) today upgraded its 2010 global growth forecast, on the back of robust growth in Asia and renewed US private demand, but flagged big risks to the recovery from Europe's debt problems.
The IMF raised its 2010 world output forecast to 4.6 per cent from 4.2 per cent previously, but said sovereign debt risks in Europe could escalate and drag on the global economy, in its latest updates of the World Economic Outlook and Global Financial Stability reports.
"Downside risks have risen sharply amid renewed financial turbulence. In this context, the new forecasts hinge on implementation of policies to rebuild confidence and stability, particularly in the euro area, the IMF said in its latest update of the World Economic Outlook.
Persistent weakness in the US. housing and labour markets, euro zone debt problems and slowing manufacturing activity in Asia have made investors speculate the global economy will slow sharply for the rest of the year.
The IMF today cut its 2011 GDP growth forecasts for Britain, Canada, the euro zone, emerging economies and Japan.
The euro area's 2010 GDP was seen expanding 1 per cent, unchanged from April, though the 2011 GDP forecast was trimmed by 0.2 percentage point to 1.3 per cent.
The 2010 US GDP growth forecast was raised to 3.3 per cent from 3.1 per cent previously, and the 2011 growth forecast was increased to 2.9 per cent from 2.6 per cent.
The biggest downward revision to GDP forecasts was in Britain, which last month unveiled a plan to cut a record budget shortfall to almost nothing in five years. The IMF expects 2010 GDP growth of 1.2 per cent, down 0.1 percentage point from a previous forecast, and 2011 GDP to rise 2.1 per cent, down 0.4 percentage point.
The biggest upward revisions to growth were in developing economies. Brazil's 2010 growth forecast was raised by 1.6 percentage points to 7.1 per cent and its 2011 forecast lifted by 0.1 percentage point to 4.2 per cent.
While uncertainty about bank regulation has added to investor concerns, the IMF focussed the majority of both reports on the implications of the euro zone sovereign crisis.
Under one scenario that assumed shocks to the global financial system resulting from Europe's debt problems would be as great as those experienced in the wake of Lehman Brothers' failure in 2008, world GDP growth in 2011 would be reduced by 1.5 percentage points.
The fund said the most prominent policy challenge was to restore financial market confidence without choking recovery.
Indeed, governments in advanced economies around the world have been putting forth plans to shrink their outsized fiscal deficits in order to maintain the confidence of bond market investors, who have been demanding higher premiums to hold risk.
Those plans will have to be balanced with growth-friendly monetary conditions.
"At a global level, 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," the IMF said in the World Economic Outlook update.
Asia was highlighted in the report.
An inventory-driven rebound in 2010 will fade to more sustainable growth across the region in 2011. However, trade and financial linkages to Europe pose risks for Asia.
The IMF said Asian central banks were well equipped to deal with potential market seizures with US dollar swap facilities, and many governments in the region had room to loosen fiscal policy if needed.
Reuters