IMF: Global economy recovering at faster than expected pace, but stimulus still needed

IMF: Global economy recovering but stimulus needed

WASHINGTON — The world economy is recovering at a faster-than-expected pace but still needs government stimulus efforts to keep it going, the International Monetary Fund said Tuesday.

The IMF raised its forecast for world economic growth in 2010 to nearly 4 percent, up from an estimate of 3.1 percent last October. It expects the U.S. economy to grow by 2.7 percent this year, significantly higher than its previous forecast of 1.5 percent.

But with unemployment high in many countries and credit tight, the recovery in the United States and other advanced economies “is still expected to be weak by historical standards,” the IMF said in a quarterly update of its World Economic Outlook.

In addition, the U.S. economy is growing largely because companies are restocking inventories that were cut sharply during the recession, and because of government stimulus programs.

Olivier Blanchard, director of the IMF’s research department, said the challenge for the United States and many European countries will be to replace those sources of growth with “sustained growth in private demand” from consumers, businesses or through exports.

“Without completing the relay to private demand, a strong and lasting recovery cannot be achieved,” he said.

Growth in the United States will likely slip to 2.4 percent in 2011 as the impact of government stimulus diminishes, said Jorg Decressin, chief of the world economic studies division.

The IMF’s forecast for the United States is similar to many estimates by private economists. The nation’s gross domestic product, the broadest measure of economic output, grew at a 2.2 percent rate in last year’s third quarter, after contracting for four straight quarters in the recession.

Most economists believe that growth picked up in the October-December quarter to a 4.5 percent to 5 percent pace. But as temporary factors like stimulus and inventory restocking fade, growth is expected to slow in the first half of this year. The U.S. government’s first estimate of fourth quarter GDP will be released Friday.

The IMF also projected that the 16 nations that use the euro would grow by 1 percent in 2010, up from its 0.3 percent estimate in October.

Growth is proceeding unevenly around the world, however. The fund kept its estimate for Japan the same, at 1.7 percent. It forecast China’s growth this year at 10 percent, and said “key emerging economies in Asia are leading the global recovery.”

A “key risk” to the recovery “is that a premature and incoherent exit” from the low interest rates set by many central banks and other stimulus programs “may undermine global growth,” the IMF said.

“In most advanced countries, it is still too early to exit” from the low interest rates and government stimulus programs introduced “during the crisis,” Blanchard said.

Bank lending, meanwhile, “is likely to remain sluggish,” the fund said, as banks seek to rebuild capital and are experiencing additional losses in commercial real estate.

Other risks to the recovery include large government budget deficits, which the IMF said could “unsettle financial markets” and lead to higher interest rates for consumers and companies.

Still, governments should continue with stimulus programs already in place for 2010, the IMF said.

And central banks “can afford” to keep short-term interest rates low for the rest of the year, providing another crucial support to economic growth, as inflation is likely to remain low for the forseeable future, the IMF said.

The IMF provides loans and other assistance to troubled countries and has 186 member nations. It also performs economic analysis and monitoring.