Global economy is expanding, but slowly: IMF

Led by Asia, the world economy is expanding again, the International Monetary Fund says, but the recovery is expected to be slow.

Its World Economic Outlook forecasts the world economy to expand around 3 per cent next year after contracting 1 per cent this year.

While those numbers are 0.6 and 0.3 per cent respectively, better than in the IMF's July update, they remain well below the growth rates that were seen before the crisis - 5.2 per cent in 2007, for example.

The IMF estimates global bank writedowns could reach US$2.8 trillion ($3.9 trillion), of which half has yet to be brought to book. Bank lending to the private sector is still stagnant or contracting in the United States, the euro area and Britain.

Bankruptcies are running at a high rate, unemployment rates are high and rising, and firms have a lot of excess capacity.

"Policies have helped cushion the impact of these forces on growth, but policy stimulus will diminish in the future," the fund says.

Among the advanced economies, the IMF expects growth to be only modestly positive in 2010, around 1.25 per cent, following a 3.5 per cent contraction this year.

Emerging economies, by contrast, are expected to grow by about 5 per cent next year, with robust domestic demand in China and India, while others benefit from the rebound in commodity prices.

"However, subdued consumption in advanced economies will weigh on many emerging economies' exports, particularly once inventory rebuilding has run its course," says the IMF.

The main short-term risk that the IMF sees is that the recovery stalls and deflationary forces will become entrenched. That could be triggered by a premature exit from accommodative monetary and fiscal policy, if a policy-induced rebound is mistaken for the beginning of a strong recovery.

Shocks that otherwise might be absorbed, like a virulent upsurge in swine flu or geopolitical tensions disrupting the oil industry, could have a significant impact given the vulnerable state of the global economy and financial system, it says.

In the medium term, once current excess capacity is absorbed, the IMF sees a risk that oil prices could rise abruptly to very high levels, just as they did during the previous upswing.

Achieving healthy and sustained growth over the medium term will depend on repairing damage to the supply side of the global economy from the crisis, particularly from a slump in business investment, and rebalancing the global pattern of demand.

"Specifically, many countries which have followed export-led growth strategies and run current account surpluses will need to rely more on domestic demand and imports.

"This will help to offset subdued domestic demand in economies that have typically run current account deficits and have experienced assets price busts."

This rebalancing is likely to be a drawn-out process, the IMF says, and in a comment, which may be directed at China, "will need to be supported by greater exchange rate flexibility".