The International Monetary Fund (IMF) has raised its global economic forecast for this year and 2009 because the effects of the credit crisis were not as bad as expected.
The IMF yesterday revised up estimates it made in April and said it now expects the world economy to grow by 4.1 per cent this year, up from 3.7 per cent. Next year's growth will be 3.9 per cent, slightly higher than April's 3.8 per cent prediction but still much lower than the 5 per cent notched up in 2007.
The IMF revised up its forecasts for growth in the UK. The fund had forecast 1.6 per cent growth in the UK this year and next but it now expects expansion of 1.8 per cent in 2008 and 1.7 per cent in 2009.
With the economy slowing, the Treasury is now set to concede that its fiscal rules on spending and debt need reworking to allow the Government to borrow more into the downturn. The slowdown has put the public finances under severe strain, with public sector borrowing on the rise and receipts from stamp duty and other taxes falling.
The fund said the effects of the financial crisis that started with the US sub-prime meltdown were still seeping into the world economy but more slowly than expected. The US fiscal stimulus package is also supporting spending by American households for now, it added.
The American economy will expand by 1.3 per cent this year and not the 0.5 per cent it estimated in April. Growth in 2009 would slow but to 0.8 per cent rather than the earlier 0.6 per cent projection. Despite the upgrades, the IMF warned that the outlook for the world economy was uncertain, with financial markets fragile and inflation on the increase.
"The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere, notably in emerging and developing countries," the fund said in an update of its World Economic Outlook. "The top priority for policymakers is to head off rising inflationary pressure, while keeping sight of risks to growth."
Central bankers are grappling with slowing economies and rising prices as energy and food prices increase, due mainly to growing demand in developing economies. The price of oil fell for the third day running yesterday, partly on the growing belief that the slowing world economy will reduce demand in manufacturing powerhouses such as China. Crude oil fell by $5.31 a barrel to $129.29 in New York.
The IMF revised up slightly growth forecasts for emerging and developing economies to 6.9 per cent in 2008 and 6.7 per cent in 2009 but the projections were still down sharply on the 8 per cent growth last year. The key Chinese economy is expected to slow to about 10 per cent from about 12 per cent last year. Beijing said yesterday that gross domestic product cooled to 10.1 per cent in the second quarter from 10.6 per cent in the first quarter.
Higher interest rates and fiscal restraint are needed in emerging economies to ward off inflation, the IMF said.
There is less call for raising interest rates in advanced eco-nomies because inflation expectations and labour costs will be tamed by slowing growth, the report said. The Bank of England has said the slowing economy should help to bring Britain's surging inflation back to target.
The IMF's more optimistic outlook was reflected in stock markets yesterday as concerns about the financial sector ebbed, at least for now. The FTSE 100 rose 2.6 per cent to 5,286.3, rebounding after hitting a three-year low on Wednesday. The pan-European FTSEurofirst also jumped, closing up 2.7 per cent. In the US, the Dow Jones Industrial Average closed up 1.85 per cent.
There was mixed economic news from the US yesterday. Figures for housing starts came in better than expected but were found to have been boosted by a change to New York's building code.