The International Monetary Fund raised its global growth forecast for the first time in more than a year, with the U.S. boosting the outlook while recent improvements remain “very fragile.”
The world economy will expand 3.5 percent this year, compared with a January projection of 3.3 percent, the Washington-based IMF said today in its World Economic Outlook. It sees growth of 4.1 percent in 2013, up from 4.0 percent. It raised its forecasts for the U.S. to gains of 2.1 percent this year and 2.4 percent in 2013.
The report reflects the IMF’s view that the euro area, while still facing an economic downturn and the “hard to quantify” potential risk of a country’s default, has stabilized since last year. The euro area economy is projected to decline by 0.3 percent in 2012, an improvement from the 0.5 percent in the IMF’s previous forecast. China is projected to grow 8.2 percent and Japan 2 percent this year.
“For the last six months the world economy has been on what is best described as a roller-coaster,” IMF chief economist Olivier Blanchard said at a briefing in Washington today. After European governments took measures to reassure markets, “an uneasy calm remains. One has the feeling that at any moment things could well get very bad again.”
The IMF last raised its quarterly projection for world growth in January 2011, when it increased the forecast to 4.4 percent for that year from 4.2 percent.
The IMF’s projections for the U.S. are below the median forecasts of 2.3 percent growth this year and 2.5 percent in 2013, according to economists surveyed by Bloomberg News.
“Improved activity in the United States during the second half of 2011 and better policies in the euro area in response to its deepening economic crisis have reduced the threat of a sharp global slowdown,” the IMF said in a summary of the report. “Weak recovery will likely resume in the major advanced economies, and activity is expected to remain relatively solid in most emerging and developing economies. However, the recent improvements are very fragile.”
“The most immediate concern is still that further escalation of the euro-area crisis will trigger a much more generalized flight from risk,” the IMF said. “Geopolitical uncertainty could trigger a sharp increase in oil prices.” A 50 percent increase in the cost of oil would reduce global output by 1.25 percent, according to the report.
Oil rose yesterday as the reversal date for the Seaway crude pipeline was moved up, causing the spread between New York-traded futures and Brent in London to narrow. Crude for May delivery gained 10 cents to settle at $102.93 a barrel on the New York Mercantile Exchange. Prices are up 4.1 percent this year.
As Group of 20 finance ministers and central bank governors prepare to meet this week in Washington, the IMF warned that policy makers in Europe “must prevent disorderly and destructive deleveraging of the banking system and to promote an adequate flow of credit to the private sector.”
Advanced economies, which include the U.S., the euro area, Japan, the U.K. and Canada, will grow 1.4 percent this year and 2 percent in 2013, the IMF said. Those are up from 1.2 percent and 1.9 percent in the January forecasts. So-called emerging and developing economies will expand by 5.7 percent in 2012 and 6 percent next year, up from earlier projections of 5.5 percent and 5.9 percent.
The IMF forecast a 1.8 percent economic contraction in Spain, worse than the 1.6 decline the lender projected in January, according to the report. Spanish Prime Minister Mariano Rajoy said yesterday that the country must slash its budget deficit to maintain access to financing, as bond yields rose to the highest level since his government came to power four months ago.
Italy, where Prime Minister Mario Monti is trying to revamp labor markets to make the economy more competitive, is forecast to contract 1.9 percent this year, better than the 2.1 percent slump the IMF had projected in January, the IMF said today.
“Some optimism has returned,” Blanchard said in a statement accompanying the report. “It should remain tempered. Even absent another European crisis, most advanced economies still face major brakes on growth. And the risk of another crisis is still very much present and could well affect both advanced and emerging economies.”
European nations should decrease the links between governments and banks, “from the creation of euro level deposit insurance and bank resolution to the introduction of limited forms of Eurobonds, such as the creation of a common euro bill market,” Blanchard said.
On China, the IMF said growth in the world’s second-largest economy had “moderated” since mid-2011, “and there is so far little sign of a sharp correction in the potentially overheated real estate sector and most related activities, despite widespread concerns about a hard landing.”
After 8.2 percent growth for China this year, the IMF forecasts an 8.8 percent expansion in 2013.
“The potential consequences of a disorderly default and exit by a euro area member are unpredictable and thus not possible to map into a specific scenario,” the IMF said. “If such an event occurs, it is possible that other euro area economies perceived to have similar risk characteristics would come under severe pressure as well, with a full-blown panic in financial markets and depositor flight from several banking systems.”
On consumer prices, the IMF projects a 1.9 percent increase this year in advanced economies and 1.7 percent in 2013. Those are higher than the 1.6 percent and 1.3 percent the lender forecast in January. In emerging and developing countries, inflation will be 6.2 percent this year and 5.6 percent in 2013.