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Global - The Australian - IMF Lifts Global Growth Forecast Print E-mail

Friday, 9th July 2010

THE International Monetary Fund has surprisingly uograded its forecast for global economic growth this year.

The fund has also raised its expectations for commodity prices, despite its growing concerns that troubles in Europe might spark a second world financial crisis.

The fund has tipped that Australia's growth will rise from 3 per cent this year to 3.5 per cent in the year ahead, and argues, in revisions to its global forecasts, that the neighbouring Asian region will lift output by close to a record 9.2 per cent.

The improved outlook is not confined to the emerging world, with the fund also upgrading its growth estimates for the US, Japan and Germany from annual estimates issued two months ago. However, it has tempered this optimism with a warning that Europe's financial instability could infect the rest of the world economy.

"Looking back, say over the first half of the year, numbers about economic activity have come in strong, indeed somewhat stronger than we had forecast," the fund's chief economist, Olivier Blanchard, said. "These would give reasons to be more optimistic than we were earlier.

"Looking forward however, strong clouds have appeared on the horizon."

The fund's review of the outlook said the financial turbulence reflected falling confidence in the sustainability of budget deficits, government policy responses and future growth prospects.

"The main risk is an escalation of financial stress and contagion, prompted by rising concern over sovereign risk."

Wayne Swan noted that Australia's expected growth was ahead of estimates for the advanced countries which, as a group, are expected to record growth of 2.6 per cent this year, slowing to 2.4 per cent in 2011.

"The IMF's report shows the Australian economy is still well ahead of the curve and continues to benefit from the government's strong economic management," the Treasurer said.

The upgrade to the IMF's forecasts was sparked by unexpectedly strong growth in the first three months of this year, particularly in Asia, with the global economy growing at an annual rate of more than 5 per cent. The fund expects some of this momentum to fade over the remainder of this year.

The fund says Asia's growth has been propelled by both healthy exports and improved domestic demand, despite the withdrawal of economic stimulus support.

It expects demand from emerging countries to lift commodity prices, other than oil, by 15.5 per cent this year, although there will be a 1.4 per cent fall next year.

It says that although Asia has little exposure to the most troubled European nations such as Greece, any stalling in the European recovery would flow through to Asia. Many Asian economies are highly dependent on external demand and their export exposure to Europe is at least as large as their export exposure to the US.

The IMF said a serious credit crisis in Europe could choke the ability of banks and companies in the Asian region to raise finance on world markets. But it said many nations in this region still had sufficient scope in their budgets to support their economies with additional stimulus spending and interest-rate cuts.

(Source: The Australian, 2010)

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