ISTANBUL: The tentative recovery enjoyed by British factories during the summer has stalled and the high street banks are tightening the credit squeeze on households. That, in a nutshell, is the scenario that currently concerns the International Monetary Fund.

Its half-yearly World Economic Outlook (WEO), published yesterday, predicted that the global economy would return to growth in 2010 but that the recovery could be as weak as the shoe-throwing protest aimed at the IMF’s managing director, Dominique Strauss-Kahn, at an Istanbul university on Thursday. The shoe fell well short of its target.

A quick scan of the data included in the WEO explains why the IMF

is so cautious. Unemployment is

rising fast everywhere, and will reach 10 per cent-plus in the US, Germany, France and Italy next year. Britain, at 9.3 per cent, is not far behind.

Such growth as there is in the west is highly dependent on government expenditure, which has stepped in to fill the gap left by the weakness of private sector demand. The result? A rapid increase in borrowing and debt that will result in an average fiscal deficit of 10 per cent for advanced countries this year.

The enfeebled state of western economies means a greater

reliance on China to be the engine

of global growth.

But the IMF fears, with some

justification, that the monetary

and fiscal easing that will result in

expected growth of 9 per cent next year has led to unsustainable levels of credit growth.

As Olivier Blanchard, the fund’s economic counsellor, put it yesterday, the good news is that a year ago it looked unlikely that by the autumn of 2009 the global economy would be returning to even modest growth.

The bad news is that the recovery has so far been dependent on a short-term rebuilding of inventories and on public spending.

“The main short-term risk,”

the WEO said, “is that the recovery stalls and deflationary forces become entrenched.” This could be the

result of the inventory upswing

running out of steam or because

lack of credit chokes the increases in investment and consumer spending necessary for the private sector to

replace the public sector as the wellspring of growth.

The other immediate risk identified by the fund is of mistakes by policymakers. It fears that central banks and finance ministries might overestimate the strength of recovery and be persuaded to raise interest rates, cut borrowing or withdraw quantitative easing prematurely.