WASHINGTON -- Pointing to renewed signs that the global slump is bottoming out, the International Monetary Fund on Wednesday upgraded its outlook for 2010 while slightly trimming this year's forecast.
The overleveraged global financial system continues to cast a shadow over the economic outlook, however, and the fund urged policymakers not to become complacent about recent market improvements.
"Financial conditions have improved, as unprecedented policy intervention has reduced the risk of systemic collapse and expectations of economic recovery have risen," the IMF said in its updating its outlook for the world economy and financial system. "Nonetheless, vulnerabilities remain and complacency must be avoided."
Financial institutions will likely face "somewhat lower" write-downs on bad debt than expected in the last report in April, when the fund estimated that global losses could top $4 trillion through next year, but it didn't provide a revised figure.
While progress has been made in recapitalizing U.S. and European banks, financial instability remains the main risk to an expected recovery next year, the fund said. Moreover, though it is too soon for governments to start unwinding crisis measures, clear and coordinated exit strategies need to be laid out to avoid a potential new wave of turmoil in sovereign debt markets, it said.
The world economy is expected to contract 1.4% this year, a slight reduction from the 1.3% decline the fund predicted in April.
However, in the first upgrade of its published forecasts in two years, the fund now foresees a 2.5% rebound in global growth in 2010. That's up from a 1.9% growth estimate in April, as well as a 2.4% growth forecast cited by The Wall Street Journal last month from a briefing prepared for Group of eight ministers.
G-8 leaders are gathering in Italy this week to discuss progress in combating the global economic crisis, which finally appears to be losing steam. Encouraged by recent improvements in both markets and economic activity -- with J.P. Morgan Chase & Co. estimating that purchasing managers indices globally had returned to pre-crisis levels last month -- the leaders are expected to turn their focus more toward devising exit strategies for once a recovery takes hold.
Still, the IMF warned that the return to positive global growth will likely be slow, especially if the weakened financial system remains an overhang.
"The global economy is beginning to pull out of a recession unprecedented in the post-World War II era, but stabilization is uneven and the recovery is expected to be sluggish," the fund said.
Brighter prospects for the U.S. and Japan have led to a better outlook for advanced economies, which are projected to expand at a 0.6% pace in 2010 instead of the previous estimate for zero growth. The group is still forecast to contract 3.8% this year, with activity not expected to pick up until the second half of 2010.
The U.S. economy is projected to decline 2.6% this year, then stage a 0.8% recovery in 2010. Those forecasts, an improvement from April forecasts for a 2.8% decline in 2009 and zero growth in 2010, are close to revised figures released last month in the IMF's annual review of the U.S. economy.
While U.S. banks have been able to raise capital, dealing with troubled assets remains a priority, the IMF said.
Japan's economy is also showing signs of stabilization, with aggressive fiscal policies and strength in regional economies expected to provide further support to growth, the fund said. The economy is expected to contract 6% this year, instead of a previous forecast of a 6.2% decline, with the 2010 growth estimate raised to 1.7% from 0.5%.
Meanwhile, the euro area is expected to continue to lag other advanced economies in emerging from the recession. The region is forecast to contract 4.8% this year and 0.3% in 2010, versus earlier expectations for declines of 4.2% in 2009 and 0.4% next year.
The U.K. economy is forecast to decline 4.2% in 2009, versus a 4.1% contraction predicted in April, though fund is now predicting a return to 0.2% growth in 2010 instead of a 0.4% contraction.
Emerging economies overall are expected to remain in positive territory, growing at a 1.5% pace in 2009 and 4.7% next year. In April, the group was forecast to rise 1.6% in 2009 and 4% in 2010.
China's outlook improved the most, with the 2009 estimate raised to 7.5% from 6.5% and the 2010 forecast lifted to 8.5% from 7.5%.
A number of emerging economies remain vulnerable to external shock, with corporate borrowers facing limited access to financing for rolling over debt, the fund said. Local governments must find a balance between supporting demand and avoiding the risk of exacerbating capital outflows and running up unsustainable budget deficits, it said.
Oil prices and other commodities have rebounded along with improved market sentiment and a depreciation in the dollar, the fund said. But while the risk of sustained deflation is small, rising unemployment and a loss of confidence in financial stability in advanced economies could trigger a deflationary spiral, it warned.
Meanwhile, looking further ahead, the fund said the crisis may have reduced the growth potential of the world economy. To enable more balanced growth in the future, the U.S. may have to shift to more export-led growth, with countries that have built up large current account deficits relying more on domestic demand, it said.
Source: Tom Barkley, The Wall Street Journal