IMF raises global economic growth forecast

image captionAsia is driving global economic growth, the IMF says

The International Monetary Fund (IMF) has raised its forecast for global growth this year, from 4.2% to 4.6%.

It said the world economy grew strongly in the first part of this year, mainly thanks to robust growth in Asia.

However, the UK was almost unique in having its 2010 growth forecast revised slightly down, while its 2011 forecast was cut by the IMF from 2.5% to 2.1%.

The IMF also warned risks had increased and there had been a setback in progress towards financial stability.

Developed economies have maintained a modest, but steady recovery in the year to date, the supranational agency said.

Debt concerns

Concerns over the sustainability of government finances in the developed world, especially Greece and others in Europe, were the major threat to global recovery the IMF argued.

It said governments should focus on improving their finances, but warned them not to make cutbacks too rapidly.

In recent weeks, a number of governments have introduced austerity measures to cut deficit levels.

"Further credible and decisive policy action us needed to resume progress on financial stability and keep the economic recovery on track," said Jose Vinals, director of the Fund's monetary and capital markets division.

The IMF said that European banks in particular were being affected by the concerns about government debt and so were less wiling to lend to each other. Less credit available to the wider economy could undermine the recovery, it argued.

Although contagion to other regions of the world was likely to be limited, there was a risk that Europe's troubles could have a more substantial impact on global economic growth, it said.

The IMF significantly raised its 2010 growth forecast for Brazil - to 7.1% from 5.5% - as well as for East Asian tiger economies such as South Korea and Taiwan.

But the UK's was downgraded to 1.2% for this year from an earlier forecast of 1.3%.

This made it one of very few countries to have its growth forecast for 2010 downgraded in the report - the IMF's first forecast since publication of George Osborne's emergency budget.

"The IMF doesn't spell out why it is now more gloomy about the UK," said the BBC's economics editor Stephanie Flanders. "But I am assured that last month's Budget is the reason."

The agency also slightly reduced its 2010 forecast for France, as well as its 2011 forecasts for the Eurozone, Japan, China and Canada.

US must try harder

Meanwhile, in a separate report, the IMF called on the US to do more to tackle its budget deficit.

"We see the need for a more ambitious adjustment to stabilise debt than that envisioned by the authorities," the Fund said in its mission report, released on Thursday.

The report said that the US should target a surplus of 0.75% of GDP by 2015, compared with a projected deficit of 11% this year - a Herculean task.

The agency suggested a number of tax-raising options:

  • cuts in tax credits, particularly for mortgage interest payments
  • higher taxes on energy
  • a national consumption tax (like VAT)
  • a financial activities tax

It also called on Washington to do more to deal with the projected growing deficit in the social security budget.

Among the various negatives for the US economy, the IMF identified:

  • continuing weak consumer spending
  • long-term unemployment
  • a possible double dip in the housing market
  • the failure of hundreds of small banks due to losses in commercial real estate
  • tight financing conditions, especially for smaller firms
  • possible spillover from the European debt crisis

The report was full of praise for the Federal Reserve, saying the US monetary authority had "deftly managed the trade-off between near-term support and medium-term credibility".

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