Washington: The International Monetary Fund (IMF) revised upwards its global economic growth projections on Wednesday, citing robust expansion in China, India and Russia, but also warned of heightened inflation risks.
In an update of its forecasts made in April, 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.
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 accompanied by a rise in domestic consumption, said Charles Collyns, deputy director of IMF’s research department.
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.
IMF slightly lowered its forecast for 2007 US growth to 2% from 2.2% in April, but left its forecast for 2008 unchanged at 2.8% as conditions were expected to improve.
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.
But IMF warned of risks that inflation pressures were building globally, notably from high energy prices, rising commodities and food prices and pressures in the labour market, particularly in advanced countries such as the US, where wages are rising and productivity is waning.
“There are concerns that inflation pressures may be picking up, and central banks will need to respond quickly and in a forward looking way to these pressures,” Collyns said.
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 added that such “risks were likely to remain largely contained.”
But IMF noted 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 the so-called ‘covenant lite’ loans where creditor protections have been loosened,” IMF said in a separate financial market update statement.