A BRIGHTER OUTLOOK FOR THE WORLD ECONOMY, BUT…

The global economy will expand by 3.9% for 2010, the IMF predicts in an update released today. That’s up from its 3.1% forecast for 2010 that was published last October. Of course, today’s forecast update contrasts sharply with last year’s modest contraction in the global economy. For 2011, the IMF expects global output will accelerate to 4.3%.
Progress, it seems, is unfolding as we write. But there are caveats as well.
“The recovery is proceeding at different speeds around the world, with emerging markets, led by Asia relatively vigorous, but advanced economies remaining sluggish and still dependent on government stimulus measures,” according to the IMF update. “For the moment, the recovery is very much based on policy decisions and policy actions. The question is when does private demand come and take over. Right now it’s ok, but a year down the line, it will be a big question,” IMF Chief Economist Olivier Blanchard said in an interview.


Leading the way in growth is China, which is expected to report a 10.0% rise in output this year, according to the IMF. A bit of corroborating support comes from news that China’s oil imports continued rising last year, despite the general retreat in economic activity around the world.
The U.S., by comparison, is expected to generate subpar growth this year and next, relative to the global economy. America’s expansion will bring a growth rate in the mid-2% range this year and next ,the IMF projects.

But there are new concerns that threaten to derail the recovery, including anxiety over efforts at tightening credit lines in China. “Reports that Chinese banks have begun to restrict new loans and the sheer reality of this happening is making traders realize that China is getting very serious about slowing their economy,” Kathy Lien, director of research at GFT Forex, tells Reuters.
Meanwhile, the hazards of sovereign risk continue bubbling. CNNMoney.com reports: “Credit rating agency Standard & Poor’s raised the prospect of a downgrade in Japan’s sovereign debt rating Tuesday. That’s reigniting fears that the U.S. could be next.”
Is government debt really a concern? Yes, in fact the potential for red ink blowback has rarely been higher than it is now, relative to recent history, as we’ve discussed, including
here and here.
The financial gods give as well as take. The question, as always, is whether there’s a net plus or minus after the dust clears. There’s a bit more concern that the bottom line overall will fall into the negative column this time around. The main challenge: The solution to the Great Recession is also the problem of the future. Or as the latest missive from the IMF warns,
“Due to the still-fragile nature of the recovery, fiscal policies need to remain supportive of economic activity in the near term, and the fiscal stimulus planned for 2010 should be implemented fully. However, given growing concerns about fiscal sustainability, countries should also make progress in devising and communicating exit strategies.”

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