THE WORLD economy is starting to pull out of recession, the International Monetary Fund (IMF) said yesterday, marking up its growth forecasts for next year and hinting that it may reduce its estimates for bank losses.
“The recovery is coming,” said Olivier Blanchard, IMF chief economist. But he cautioned “it is likely to be a weak recovery”, and said policy-makers needed to guard against economic and financial risks.
Investors signalled their doubts about the strength of the economic recovery by selling off commodities, notably oil and gold, and stocks. The yen, a barometer of rising risk aversion, also rallied 3 per cent against the euro and the dollar.
The IMF report came amid clashes in the US Congress over the possible need for additional fiscal stimulus to fight rising unemployment. Republicans attacked the current stimulus as a failure, while Democratic leaders in the House and Senate sent conflicting signals as to whether further stimulus might be needed.
The IMF now forecasts global growth of 2.5 per cent next year, up from 1.9 per cent in April, led by strong growth in China and India, a rebound in Japan and positive but sub-trend growth in the US.
It also upgraded its forecasts for Europe, but still expects the euro zone to contract by 0.3 per cent next year, with export-led and bank-financed Germany declining 0.6 per cent. The IMF said the euro-area economy would likely shrink 4.8 per cent this year, 0.6 percentage points more than it had forecast in April.
The fund inched down its forecast for global growth this year to minus 1.4 per cent from a previous estimate of minus 1.3 per cent.
Despite the modest recovery, the IMF said growth would remain below potential until later in 2010, suggesting unemployment would continue to rise.
The IMF did not update its closely-watched estimates for losses facing banks and other financial institutions, which are under review. However, Jose Vinals, IMF financial counsellor, said it would be reasonable to guess that the loss estimates would end up being lowered.
Mr Vinals said markdowns on securities “would be likely to be somewhat better now” following the improvements in markets. Meanwhile estimates for loan charge-offs may be “somewhat smaller” because of the upgrade in the forecast for growth.
However, the IMF warned against complacency, saying it was too soon to implement “exit strategies” and highlighting several risks to recovery.
It urged further efforts to clean up the banking system, noting that “bank capitalisation remains a concern, notably in Europe”.
The IMF also signalled concern that governments on both sides of the Atlantic had only “limited” success in dealing with problem assets. It said concerns about rising government debt from efforts to shore up economies highlight the need to establish plans to tighten budgets over the medium-term. – (Copyright The Financial Times Limited 2009)
