Washington: The International Monetary Fund (IMF) revised up its global economic growth projections on Wednesday (25 July), citing robust expansion in China, India and Russia, but also warned of heightened inflation risks.
In an update of its forecasts made in April, the IMF said the US appeared to be regaining some momentum despite risks posed by a housing downturn and financial market volatility driven by subprime mortgage market defaults.
The IMF’s updated World Economic Outlook forecast global growth of 5.2% for both 2007 and 2008, up from an April forecast of 4.9% for both years.
China’s 2007 growth projection was revised to 11.2% from 10% as strong growth in exports and investment is being accompanied by a pickup in domestic consumption, said Charles Collyns, deputy director of the IMF’s research department.
Collyns noted that for the first time, China was the biggest contributor to global growth on a market exchange-rate basis, and together, China, Russia and India account for more than half of the year’s 5.2% growth projection, he added.
“China seems to be going from strength to strength at this point. It’s hitting on all cylinders,” Collyns said.
Strong recent retail sales figures were an encouraging sign that China’s economy may be starting to shift from an “excessive” reliance on exports to one more based on household consumption, he added.
The IMF slightly lowered its forecast for 2007 US growth to 2% from 2.2% in April, but left its 2008 forecast unchanged at 2.8 percent as conditions were expected to improve.
The housing downturn will continue to be a drag on US economic performance, but its effect is starting to lessen, while business investment is recovering and consumer demand is holding up, the IMF said.
Growth projections were revised higher in the euro area, particularly in Germany, where the negative effects of a value-added tax increase on consumer spending were not as bad as previously forecast. Japan also saw its growth revised higher as domestic demand strengthened.
Inflation pressures grow
But the IMF warned of risks that inflation pressures were building globally, notably from high energy prices, rising commodities and food prices and pressures in labour market, particularly in advanced countries such as the US, where wages are rising and productivity is waning.
Although thus far inflation looked contained, central banks were now more likely to tighten monetary policy than in the April outlook.
“There are concerns that inflations pressures may be picking up, and central banks will need to respond quickly and in a forward looking way to these pressures,” Collyns said.
The IMF also said risks in global financial markets had increased due to volatility in credit markets spurred by defaults in the subprime mortgage sector. Although it said mortgage defaults were likely to continue and credit product would continue to reprice, it asdded that such “risks were likely to remain largely contained”.
It noted, however, that investors had less appetite for leveraged loan investments, which could put pressure on banks financing and underwriting leveraged buyout deals.
“While the degree of leverage has continued to rise, some investors are becoming reticent to accept so-called “covenant lite” loans where creditor protections have been loosened,” the IMF said in a separate financial market update statement.