Friday, July 9, 2010

IMF raises world growth forecast

But euro zone's debt woes posing threat to recovery, it warns

HONG KONG: The International Monetary Fund (IMF) upgraded its 2010 global growth forecast yesterday, citing robust expansion in Asia and renewed private demand in the United States, but warned the euro area's debt crisis posed a big risk to recovery.

The IMF said the euro zone's sovereign financing problems and resulting financial market turbulence were significant challenges, especially with the web of financial and trade links connecting Europe to the world. However, a double-dip world recession was highly unlikely.

The fund raised its global output forecast for this year to 4.6 per cent from 4.2 per cent in April's review of the global economy, but kept its view for next year unchanged at 4.3 per cent. The world economy shrank 0.6 per cent last year as a result of the global financial crisis.

'What has happened in Europe is likely to slow down the path to recovery relative to what could have happened, but I think the chances of a double-dip are very small,' Mr Olivier Blanchard, the IMF's chief economist, said at a briefing in Hong Kong for the organisation's latest World Economic Outlook and Global Financial Stability reports.

But in a move that might fuel concern that recovery is fading, the fund lowered its growth forecast next year for China from 9.9 per cent to 9.6 per cent, for Japan from 2 per cent to 1.8 per cent, for the euro zone from 1.5 per cent to 1.3 per cent, and for Britain from 2.5 per cent to 2.1 per cent.

Persistent weakness in the US housing and labour markets, euro zone debt problems and a slowdown in growth of manufacturing activity in Asia have made investors speculate that the global economy will slow sharply for the rest of the year.

While uncertainty about bank regulation has added to investor concerns, the IMF focused the majority of both reports on the implications of the euro zone sovereign crisis.

In the news briefing, Mr Blanchard said the European bank stress test disclosures due on July 23 were an important step towards transparency but underscored that countries must return to a sustainable level of fiscal spending.

Under one scenario - assuming shocks to the global financial system resulting from Europe's debt problems are as severe as those experienced in the wake of the Lehman Brothers' failure two years ago - world gross domestic product growth next year would be reduced by 1.5 percentage points, the IMF said.

Asian economies will expand faster than expected this year but 'downside risks' have intensified for the region following financial turmoil in the euro zone area, the IMF warned.

The Chinese economy should expand by 10.5 per cent following a strong rebound in exports and resilient domestic demand, the fund said, revising upwards its April forecast of 10 per cent.

India's growth this year was revised higher to 9.4 per cent from 8.8 per cent as robust corporate profits and favourable financing conditions fuel investment.

With the upward revisions for the world's two most populous countries, Asia as a whole was forecast to grow by 7.5 per cent this year, up from 7 per cent in April.

However for next year, when stimulus programmes are expected to be withdrawn in several countries, Asia's growth is expected to settle to 'a more moderate but also more sustainable rate' of 6.8 per cent, the IMF said.

Following warnings by the fund earlier this year about the formation of asset bubbles in Asia, such problems in the market had eased, said Mr Jose Vinals, the IMF's financial counsellor.

But the IMF warned that any stalling in the European recovery could affect Asia through both trade and financial channels, even though the region has only limited direct financial linkages to the most vulnerable euro area economies.

'Many Asian economies (especially the newly industrialised economies and the Asean economies) are highly dependent on external demand, and their export exposure to Europe is at least as large as their export exposure to the United States,' the report said.

However, in the event of 'external demand shocks', large economies such as China, India and Indonesia could provide a cushion to growth, it said.


Source: Straits Times, 9 Jul 2010

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