World recovering faster than expected: IMF

ISTANBUL: The International Monetary Fund said the global economy is recovering faster than expected — but that governments should not be hasty in withdrawing the added spending and low interest rates that have helped restore growth.

The positive report card Thursday was likely to feed cautious but widespread relief that — despite a continuing rise in unemployment and worries about credit availability — the downturn has eased and that a 1930s-style depression has been avoided.

According to the twice-yearly World Economic Outlook, the world is poised to grow by 3.1 percent in 2010 with much of the recovery driven by emerging economies such as China and India. That is up from the 2.5 percent in the IMF's previous set of estimates.

And for 2009, the IMF now expects a 1.1 percent decline of global GDP instead of the 1.4 percent contraction it predicted in July.

But though things may not be as bad as they could have been, the IMF sought to temper any euphoria, especially as unemployment will continue to rise for many months yet.

"The recovery has started in terms of having positive output growth," Olivier Blanchard, the IMF's economic counsellor told The Associated Press in an interview.

He credited the modest improvement to "strong policy responses" around the world but warned against a "premature exit from those policies" — the recovery is too fragile and remains heavily propped up by big stimulus measures and cheap money.

He noted that growth next year is still way below levels before the financial crisis exploded around a year ago, and cautioned there were still risks to the forecast. He said banks are not out of trouble yet and swine flu remained a potential drag.

Blanchard stressed that the more optimistic forecasts "should not fool governments into thinking that the crisis is over."

In the outlook, the IMF, which has seen its responsibilities and financial resources expanded during the crisis, said economic growth has turned positive as concerted efforts by governments and central banks boosted demand and helped ease fears of total collapse of the world's financial system. Banks have been bailed out, economies stimulated with deficit spending, and interest rates sharply reduced. France, German and Japan are officially out of recession.

Blanchard said it's inevitable that governments will have to get a grip on their finances but only when recovery is firmly entrenched.

"There is a very delicate balancing act that governments have to succeed in doing," he said.

When the time comes to deal the debts, which are projected to reach 110 percent of gross domestic product by in the advanced economies, governments will have to deal with spiraling pension and health care costs — both are rising as people live longer.

"We've done many hard things during this crisis and this is the next set of things that we have to do," he said.

The IMF said policymakers have to make sure that markets and the banks support the economic recovery and that reforms are put in place to prevent a similar crisis in the future.

It also said that achieving sustained healthy growth over the medium term will also depend on rebalancing the pattern of global demand. Countries running massive trade surpluses based on export-led growth strategies will need to find a way to deal with likely subdued domestic demand in import-heavy economies, which have experienced stock and housing market busts that reduce their purchasing power.

That means countries like China, Germany and Japan have to spend more and save less to deal with lower consumption in the U.S., which has been living beyond its means on credit and relying on the cheap price of imports from China, where the currency is weak.

Blanchard said he couldn't see how the rebalancing of the world economy could happen at current exchange rates. Without actually mentioning the Chinese yuan, he said Asian currencies will have to rise in value against the dollar.

Blanchard said he's hopeful that progress will be made towards such a rebalancing, even though similar warnings from the IMF in 2006 were largely ignored — the crisis had focused minds.

"I think the commitment and the need are higher and I think this time we have a better chance of succeeding," he said.

The fund expects the U.S., the world's largest economy, to grow 1.5 percent next year, up 0.7 percentage points on the previous forecast. For 2009 as a whole, the IMF is predicting that the U.S. will shrink by 2.7 percent.

Meanwhile, the 16 countries that use the euro are expected to grow 0.3 percent in 2010, contrasting July's prediction of an equivalent decline. The predicted growth, though modest, will be welcome as it follows a massive 4.2 percent slump in 2009 as exports, particularly from Germany, slumped.

Japan, Asia's largest economy, is also expected to rebound, with the IMF penciling in growth of 1.7 percent. Like the euro zone, Japan saw massive output declines in 2009 — the IMF is predicting a 5.4 percent reduction — as demand fell sharply for its high-value exports, such as cars.

The IMF said much of 2010's global growth will be dependent on Asia, not least China and India, which are expected to grow by 9 percent and 6.4 percent, respectively.