IMF: World recovering faster than expected

ISTANBUL, Turkey -- The global economy is recovering faster than expected but governments should be careful to not withdraw their stimulus measures prematurely, the International Monetary Fund said Thursday.

The positive report card was likely to feed cautious but widespread relief that -- despite a continuing rise in unemployment and worries about credit availability -- the downturn is easing and may prove less devastating than initially feared.

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 it warned against premature withdrawal of stimulus efforts and said uncertain growth in the developed world could soon put governments in a vise -- between keeping their stimulus spending going, or cutting it back to avoid ruining their finances with debt and deficits.

The IMF, which has seen its responsibilities and financial firepower expand during the financial crisis, said economic growth has turned positive -- France, Germany and Japan are already officially out of recession -- as concerted efforts by governments and central banks have 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.

"The recovery has started, financial markets are healing and in most countries growth will be positive for the rest of the year as well as in 2010," Olivier Blanchard, the IMF's economic counselor, told reporters in a press briefing following the release of the World Economic Outlook.

However, Blanchard said the more optimistic forecasts "should not fool governments into thinking that the crisis is over" and he insisted countries must "avoid a premature exit from the policies" they put in place over the last year or so.

He noted that growth next year is still way below the levels before the financial crisis exploded around a year ago and cautioned that there were still risks to the forecast. He said the banking sector isn't out of the woods yet and swine flu remained a potential drag.

In the best case, reduced fears about a 1930s-style crash and an accompanying strong rebound in financial market sentiment could drive a larger-than-projected short-term increase in consumption and investment.

Regarding the banking sector, 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. Specifically, the IMF said 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 effectively means that countries like China, Germany and Japan will have to make do with lower consumption levels 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.

The IMF's 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.

"Our forecasts are based on the assumption that limited global rebalancing will take place, leading to a weak recovery, especially in advanced countries," Blanchard said.

For the U.S., the world's largest economy, the IMF raised its 2010 growth forecast by 0.7 percentage point to 1.5 percent, following an anticipated 2.7 percent contraction in 2009.

Meanwhile, the 16 countries that use the euro are expected to grow by 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 too, 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.

IMF figures showed foreign currency reserves rose steadily in 2009, likely due to increased public debt auctioned off by major economies as they pay for expensive bailout plans.

The dollar accounted for 63 percent of total allocated reserves in the second quarter, down from 65 percent in the previous three months, while the euro's share of reserves rose to 27 percent from 26 percent, according to IMF data.