The International Monetary Fund (IMF) has raised its world economic growth forecast from 4 per cent to 4.5 per cent, reflecting the positive impact of economic activity in the first half of the year as much as it did the “strong clouds [that] have appeared on the horizon,” according to an official statement.

Offering comments on the release of the updated forecast, Olivier Blanchard, Chief Economist at the Fund, said, “While we remain cautiously optimistic about the pace of recovery, there are clear dangers and policy challenges ahead.”

In particular, there were concerns about how Europe would deal with fiscal and financial problems, the progress that advanced countries make with fiscal consolidation, and the efforts of emerging countries to rebalance their economies, Mr. Blanchard noted.

On the upside, the Fund report said, the numbers on economic activity for the first half of the year “have come in strong, indeed somewhat stronger than we had forecast”. These would give reasons to be more optimistic than the fund had been earlier, Mr. Blanchard added, referring to an April forecast for growth according to which world economic output was expected to expand at 4 per cent.

Specifically the Fund was cheered by the fact that the world economy expanded at an annualised rate of over 5 per cent in the first quarter of 2010 and that growth was stronger than expected in most countries, including the United States, Europe, Japan, Brazil, and India. “A good sign for the future,” according to the IMF was the finding that in most cases, such growth reflected stronger private demand.

Yet on the downside Mr. Blanchard cautioned that the strong clouds that had appeared on the horizon present “real dangers and serious policy challenges, and give reasons to be less optimistic than we were earlier”.

Clouds threaten global economy

The clouds started building over Greece, but quickly extended to Europe, Mr. Blanchard explained, underscoring that these clouds threatened to cover the entire global economy. He argued that worries about fiscal solvency in Greece got transmitted to fiscal solvency concerns elsewhere and this in turn led to doubts about “the solvency of banks… financial turbulence, disruptions in market financing and a freeze in the interbank market in Europe”.

Despite striking this ominous note for the future, the IMF still noted that its forecast for 2011 would remain broadly unchanged, at about 4.25 per cent. It added that both this and the 2010 growth rates however “hide a large difference between and within advanced and emerging and developing economies”.

In particular, the IMF forecasted growth for advanced countries at 2.6 per cent for 2010 and 2.4 per cent for 2011, emphasising that these low growth rates implied that high unemployment would remain a central issue.

In significant contrast however, the Fund’s growth projection for emerging and developing economies was 6.8 per cent in 2010 and 6.4 per cent in 2011, which included an upward revision of 0.5 per cent for 2010 and a downward revision of 0.1 per cent for 2011.

The IMF also called upon emerging countries such as India to deal with capital flows, expected to increase in the aftermath of the crisis in Europe, because such flows were “largely driven by good fundamentals, and likely to be long lasting.” Mr. Blanchard said that limiting their size through controls, or fighting their effect on the exchange rate through reserve accumulation, may prove “difficult and eventually self defeating”.

The Fund also recommended that emerging market countries focus on shifting from external to internal demand, as that would permit them to maintain growth in the face of lower exports to advanced countries, and to better satisfy domestic needs. This would require both structural reforms and exchange rate appreciations, the fund said.

DPA reports:

Asia’s regional economy was projected to grow 7.5 per cent in 2010, the International Monetary Fund (IMF) said on Thursday, raising the 7 per cent growth rate it predicted in April.

A combination of exports and strong private domestic demand lent “continued buoyancy” to the region’s economic activity, according to a revised version of the IMF’s World Economic Outlook released in Hong Kong.

First-quarter gross domestic product reports were “stronger than anticipated” across the region, the Washington-based IMF said, prompting the upgrade.

The strength of Asia’s economic growth this year contrasted with that of the recession-hit year of 2009, when it was 3.6 per cent.

In a briefing on the report in Hong Kong Thursday, Jose Vinals, director of the IMF’s Monetary and Capital Markets Department, said the IMF had felt it fitting to present the latest assessment in Asia because of the region’s performance through the global financial crisis.

“Having withstood the crisis with a vibrant and resilient financial system, Asia is well-placed to provide the momentum for a robust global recovery,” Mr. Vinals said.

Strong performances in Asia and Latin America drove the IMF to revise upward its overall projection for global economic growth in 2010 to 4.6 per cent, up from previous estimates of 4.2 per cent in April and 3.9 per cent in January, as Europe and other advanced economies struggle to regain financial stability.

Mr. Vinals said the recovery was well under way in Asia, where the impact of the current bout of financial instability caused by debt problems in the Eurozone had so far been limited.

He said the most obvious effect of these financial strains on emerging markets had been a slowdown in portfolio inflows.

“Not surprisingly, the spillovers have been felt most in emerging European countries, where direct linkages are the greatest,” he said.

Mr. Vinals, however, warned that sovereign and banking risks in the Eurozone could spill over to other regions unless urgent action was taken.

“Further credible and decisive action is thus needed to resume progress on financial stability and keep the recovery on track,” he said.

The report said China’s economy, projected to grow 10.5 per cent this year and 9.6 per cent in 2011, was leading the way.

Jorg Decressin, head of the IMF’s world economic studies division, said China’s forecast had been revised upward by around 0.5 percentage points for 2010 because of much stronger-than-expected growth in the first quarter although the growth was expected to slow down somewhat in the second half of the year.

“Where does this growth come from? From very strong retail sales, for example, related to strong consumption and strong investment growth,” Mr. Decressin said.

India, with expected 9.4 per cent growth, has “robust corporate profits” and “favourable financing conditions” and was expected to slow down to 8.4 per cent in 2011.

Collective growth for the 10 members of the Association of South-East Asian Nations was projected at 6.4 per cent in 2010 and 5.5 per cent next year.

Japan was expected to grow 2.4 per cent this year because of stronger—than—expected exports and 1.8 per cent in 2011 “as the fiscal stimulus gradually tapers off,” the IMF said.

New Zealand and Australia were expected to grow about 3 per cent this year and 3.5 and 3.2 per cent, respectively, in 2011.

The report warned that continuing financial turbulence in the Eurozone could spill over to Asia through reduced demand for exports but added that growing domestic demand in China, India, Indonesia and elsewhere “could provide a cushion to growth.”