Washington: The global economy has recovered from recession more quickly than expected but emergency rescue efforts have worsened public finances, leaving countries vulnerable to new shocks, the IMF said on Wednesday.
In its World Economic Outlook, the International Monetary Fund nudged up its 2010 global growth forecast to 4.2% from its January estimate of 3.9%, and kept next year’s view unchanged at 4.3%.
“The outlook for activity remains unusually uncertain,” the Fund said, adding that risks were generally tilted to the downside. Government debt burdens were top of the worry list.
“The main concern is that room for policy manoeuver in many advanced economies has either been largely exhausted or has become much more limited, leaving these fragile recoveries exposed to new shocks,” the Fund said.
Emerging economies are leading the upturn, with 2010 growth expected to be nearly three times as fast as that in advanced economies.
The IMF forecast growth in emerging and developing economies would rise to 6.3% this year and 6.5% next year. In advanced economies it would reach only 2.3% in 2010 and 2.4% in 2011.
China will grow fastest — by 10% this year and 9.9% in 2011. Elsewhere, Brazil, India and Indonesia are also staging strong rebounds.
Rich countries are shouldering a much heavier debt burden, with debt-to-GDP ratios approaching World War Two highs. While the IMF urged countries to “urgently” adopt credible debt-reduction strategies, it said most stimulus measures planned for 2010 should be fully implemented because the recovery remained fragile and unemployment high.
Most advanced economies should embark on a significant fiscal consolidation in 2011, and a few should start sooner.
The IMF’s oft-repeated debt warnings have taken on greater significance in recent months as Greece’s fiscal woes intensified, driving up its borrowing costs and forcing officials to lay out a possible rescue package.
The Fund said fiscal consolidation was a top priority for many countries, and should take precedence over normalizing ultra-low interest rates.
The debt reduction task is daunting. The withdrawal of stimulus measures would reduce government spending by only about 1.5% of GDP. Countries would need adjustments three times larger than that just to stabilize debt-to-GDP ratios at current levels.
Restoring ratios to pre-crisis levels would take an even sharper adjustment, and would probably require tax increases and cutbacks on spending on things like social security and other core government programs.
“As they stand, typical current entitlement programs imply off-balance-sheet liabilities well in excess of actual public debt,” the IMF said.
The IMF said global activity is recovering at varying speeds with the United States off to a better start than Europe or Japan, mainly because of the size of fiscal stimulus.
While the IMF revised up its forecast for the United States, it cautioned that uncertainty about the US outlook “remains elevated” although less than previously thought.
The euro-area will eke out weak growth both this year and next of around 1%, with only Greece’s economy left shrinking in 2011 as the bloc emerges from the recession.
By contrast, recoveries in Australia and Asia are off to a strong start and will likely remain that way, the IMF said, though it also said the Bank of Japan may yet have to loosen monetary policy further if deflation persists.
In Sub-Saharan Africa, most economies are expected to stay close to their potential output, while economies of emerging Europe will continue to lag behind, with some exceptions.
The IMF raised its outlook for Latin America and maintained its forecast for the Middle East and North Africa.
Without pointing fingers at China, the IMF said some countries were resisting exchange rate appreciations that would support strong domestic demand and reduce excessive current account surpluses because they worried the move could destabilize their economies.
It said currencies of a number of emerging Asian economies remain undervalued, substantially in the case of China’s renminbi, while the US dollar and euro are “on the strong side” relative to medium-term economic fundamentals.