In the most recent update of its World Economic Outlook, the IMF is distinctly more upbeat on the prospects of the global economy than at any time during the past two crisis-ridden years. Economic recovery across the globe is faster than previously estimated. From a negative growth in 2009, the world economy is projected to grow by 3.9 per cent this year and by 4.3 per cent in 2011. The IMF has revised upwards almost all its forecasts made in October 2009, quite substantially in many cases. For instance, in October it had projected the world economy to grow by just 3.1 per cent. In keeping with the observation that has become fairly routine in reports of world bodies including the IMF and the World Bank, China and India are in the forefront of the recovery, with a projected growth rate of 10 per cent and 7.7 per cent respectively in 2010 and 9.7 per cent and 7.8 per cent in 2011.
In contrast, the advanced economies will grow by just 2.1 per cent this year. This certainly will be a vast improvement over 2009, which saw a contraction. But it is not good enough to warrant a roll-back of the strong policy-backed stimulus measures. On the positive side, consumption has been unexpectedly strong, especially in the United States. An appetite for risk is re-emerging and equity markets have rebounded in many countries. In the industrial countries, inflation is not an immediate threat and investor confidence is picking up. But high unemployment rates, rising public debt and, in some countries, weak household balance sheets pose major challenges to recovery. The recovery has been helped by the corrective steps the central banks and governments have taken. But, sooner than later, private demand will have to take over. A withdrawal of these measures in the immediate future carries the danger of pushing these countries back into a recession. Given the fragile nature of recovery, fiscal policies need to be supportive of economic activity in the near term and the fiscal stimulus planned for 2010 should be implemented. However, in the face of mounting fiscal deficits that may not be sustainable very much longer, many countries are already planning appropriate exit strategies. Given the varying pace of recovery, the retreat has to be timed and calibrated according to the situation obtaining in each country.
