IMF forecasts rebound in global growth but cautions that rising government debt poses threat

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IMF says global economy to grow 4.2 pct this year

WASHINGTON — The International Monetary Fund said Wednesday that the global economy, after enduring a crippling recession, should see better-than-expected growth this year, led by strength in China and other developing nations.

In an updated economic outlook, the IMF forecast that the world economy would expand 4.2 percent this year, faster than its previous projection and a sharp improvement from 2009 when global output fell by 0.6 percent, the worst performance since World War II.

However, the international lending agency warned that the recovery still remained vulnerable with the biggest threat likely to come from a surge in government debt burdens.

“The outlook for activity remains unusually uncertain,” the IMF said in its latest World Economic Outlook. “Although a variety of risks have receded, downside risks related to the growth of public debt in advanced economies have become sharply more evident.”

The IMF’s estimate that the global economy would grow 4.2 percent this year, represented a 0.3 percentage point increase from the IMF’s January forecast. For 2011, the IMF projected global growth of 4.3 percent, no change from its January outlook.

The IMF expects wide disparities between regions with the United States outperforming Europe and Japan but lagging behind China and other developing nations.

For the United States, the IMF expects growth of 3.1 percent this year, in line with private forecasters, after a 2.4 percent plunge in the U.S. gross domestic product in 2009, the biggest decline since 1946.

The IMF forecast that China’s economy would surge 10 percent this year and that India would grow 8.8 percent. But it looked for the 16 European countries that share the euro currency would see economic growth of just 1 percent in 2010.

The new forecast was prepared for upcoming meetings of global financial leaders including daylong talks Friday involving the Group of 20 nations, which include the world’s richest industrial countries and major developing nations including China, Brazil, India and Russia.

The U.S. delegation will be led by Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke. The G-20 talks and weekend discussions at the IMF and World Bank are expected to focus on overhauling financial regulatory systems and rebalancing global growth to make the recovery more sustainable.

U.S. Treasury officials who briefed reporters Tuesday on Geithner’s agenda said they believed support was growing for a financial risk levy along the lines of one proposed by President Barack Obama that seeks to raise $90 billion from the largest U.S. banks to recoup losses from the $700 billion financial bailout fund.

The U.S. officials said they expected another key discussion topic would be the need to eliminate global imbalances, a goal that Obama and other G-20 leaders set at a summit in Pittsburgh last September.

The rebalancing effort would mean that countries with large trade and budget deficits would seek to boost savings and lower domestic demand while countries such as China that are running huge trade surpluses would transition to more domestic-led growth.

To foster the change in China, the Obama administration has been pressuring Beijing to allow its currency, the yuan, to rise in value against the dollar. American manufacturers contend the yuan is undervalued by as much as 40 percent, giving Chinese producers huge trade advantages over U.S. companies.

However, the Treasury officials did not answer directly when asked whether the U.S. complaints would be brought up in the G-20 discussions. The administration has been seeking recently to temper its rhetoric with China on currency issues in hopes a softer tone will gain better results.

The IMF outlook, however, warned that a the sharp narrowing of the U.S. trade deficit in 2009 and the lower Chinese trade surplus were likely. The IMF said it was essential for China, now the world’s third largest economy, to do its part to assist in combatting global imbalances.

The IMF said even with global growth rebounding, unemployment was likely to remain high in the United States and other developed countries over the next two years, given the severity of the downturn in those nations.