How the IMF views the way forward

FT.com recently reported on how the International Monetary Fund views the economic recovery in their bi-annual World Economic Outlook:

A recovery in the world economy is now under way, the International Monetary Fund said on Thursday, but it warned there were many obstacles to sustained rapid growth. The IMF rejected forecasts for either a rapid V-shaped recovery or a double-dip recession, saying the recovery will most likely be “weak by historical standards”.

The IMF is no more optimistic about the medium-term outlook, insisting that growth prospects depend on resolving two difficult challenges: the weakness in the banking system; and the persistent unwillingness of countries with large trade surpluses to boost domestic demand and become motors of world growth.

The economic crisis, which resulted in the deepest global recession since WWII, has led to a permanent loss of output, the IMF said. Most economies now have a large amount of spare capacity which is likely to keep inflation low, in spite of the extraordinarily expansionary monetary and fiscal policies undertaken by central banks and governments around the world.

But for the first time in more than a year, the IMF’s economic declarations have not become more gloomy. It has revised higher its forecasts for world growth, reflecting its view that there was now a much lower risk of the recession turning into something even nastier.

“Strong public policies across advanced and many emerging economies have supported demand and all but eliminated fears of a global depression,” the World Economic Outlook said.
The IMF forecast that world economic output would rise by 3.1 per cent in 2010 after contracting by 1.1 per cent in 2009, an upward revision of 0.6 percentage points for 2010 from its most recent forecast in July.

Emerging economies will grow much more quickly than advanced economies, the IMF says, with growth averaging 5.1 per cent in the emerging world, even including the troubled central and eastern European regions, and only 1.3 per cent in rich countries. Central banks of rapidly growing emerging markets might have to raise interest rates soon.

In the short-run, the IMF believes the recovery will be sluggish because “the policy forces that are driving the current rebound will gradually lose strength, and the real and financial forces remain weak”. Unemployment is forecast to keep rising across developed economies, so the recovery will feel “jobless” in most countries.