IMF sees 'optimism return' as faster growth predicted

Christine Lagarde The IMF's Christine Lagarde has said that austerity is not the only solution to the woes of the global economy

The International Monetary Fund (IMF) has said that "some optimism has returned" to the global economy and has predicted slightly faster growth.

The IMF revised world economic growth for 2012 to 3.5%, up from its previous forecast of 3.3%.

It also expects the UK to grow faster this year, by 0.8% rather than 0.6%.

But the IMF noted another eurozone crisis was possible and that most major economies "still face major brakes on growth".

Hopes raised

The eurozone recently agreed a second multi-billion-euro bailout for Greece, making a default of the country less likely, and has created a permanent rescue fund, hoping to contain a crisis that has dragged on for years.

Separately, the US unemployment rate has fallen to 8.2%, the lowest rate since 2009, raising hopes for a recovery in the world's largest economy.

"With the passing of the crisis, and some good news about the US economy, some optimism has returned," the IMF said.

But it added the "risk of another crisis is still very much present".

As if to underline that point, Spain is the only eurozone country whose growth has been revised even lower for 2012.

Spain woes

Spain's 10-year bond yields have risen past 6%, making it more expensive to borrow as investors fear that Spain will need a bailout.

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Temporary tax hikes matched by increases in government purchases... could lead to an almost equal rise in output”

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Investors have been worried by data showing Spain's banks are entirely dependent on emergency ECB loans, as the nation suffers from a deep economic slump brought about by a bust in its property and construction markets.

On Tuesday, the rate for Spanish 18-month bonds almost doubled to 3.1%, suggesting that rates could rise significantly at a more important sale of 10-year bonds on Thursday.

Unemployment is the highest in Europe, with a record 4.75 million out of work. Half of Spain's under-25s are unemployed.

The IMF expects Spain to contract by 1.8% in 2012, compared with its previous prediction of a contraction of 1.6%.

The 17 countries of the eurozone are expected to shrink this year, but less than previously forecast, by 0.3% rather than 0.5%.

Meanwhile, developing economies such as China and Brazil are expected to grow even more this year, expanding by 5.7% rather than 5.5%.

More generally, the body warned on the austerity programmes most Western countries have engaged in, and advocated greater spending - possibly funded by tax increases - to keep growth ticking along.

"Given concerns about fiscal room, a balanced budget fiscal expansion could support activity and employment while keeping fiscal consolidation plans on track," the IMF said.

"For example, temporary tax hikes matched by increases in government purchases - for much-needed infrastructure - could lead to an almost equal rise in output."

British situation

The UK's growth forecast for 2013 has been left at 2% by the IMF, which noted that "the financial sector was hit hard by the global crisis".

The global body's revised UK forecasts now match with those of the UK's independent Office for Budget Responsibility.

But both are more optimistic than most independent UK economists, who expect economic growth of about 1.6% next year.

"In the United Kingdom, with inflation expected to fall below the 2% target amid weaker growth and commodity prices, the Bank of England can further ease its monetary policy stance," the IMF said.

The IMF's latest World Economic Outlook came a day after the World Bank appointed a new president, the US's Jim Yong Kim.

By convention, the US has always held the top job at the World Bank since it was founded in 1944.

The top job of its sister organisation, the International Monetary Fund, has also always gone to a European but there has been much pressure from emerging economies to open the processes of both organisations to competition.

The IMF is currently led by France's Christine Lagarde.

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