Despite New Risks, Global Recovery Seen Gaining Strength

Global growth forecast at around 4 1/2 percent for both 2011 and 2012

High unemployment and commodities prices pose major social concerns

More progress urgently required on fiscal and financial repair and reform

Work needed to rebalance global demand, address imbalances

High commodity prices present new policy challenges, while old challenges––fiscal and financial repair and reform and the rebalancing of global demand–remain work in progress.

“Given the improvement in financial markets, buoyant activity in many emerging and developing economies, and growing confidence in advanced economies, economic prospects for 2011–12 are good,” the IMF said in its April 2011 World Economic Outlook (WEO). However, disruptions to oil supply pose new risks to the recovery.

“Fears have turned to commodity prices,” said Olivier Blanchard, Chief Economist at the IMF. “Commodity prices have increased more than expected, reflecting a combination of strong demand growth and a number of supply shocks. These increases conjure the specter of 1970s-style stagflation, but they appear unlikely to derail the recovery,” he told a press conference in Washington.

Financial conditions fragile

Real GDP in advanced economies and emerging and developing economies is expected to expand by about 2½ percent and 6½ percent, respectively (see table below).

In the report released on April 11, it said financial conditions continue to improve after the global crisis, although they remain unusually fragile.

In many emerging market economies, demand is robust and overheating is a growing policy concern. Developing economies, particularly in sub-Saharan Africa, have also resumed fast and sustainable growth. But the IMF said new risks have emerged:

• Rising food and commodity prices pose a threat to poor households, adding to social and economic tensions, notably in the Middle East and North Africa.

• Oil prices have shot up because of unrest in the Middle East. The WEO said disruptions so far would have only mild effects on economic activity but, given falling spare oil production capacity, risks are on the downside.

• The IMF said that the earthquake and tsunami in Japan had exacted a terrible human toll but that its global macroeconomic impact would be limited.

Many old challenges unaddressed

The IMF said many old policy challenges remain unaddressed even as new ones arise. In advanced economies, weak sovereign balance sheets and still-moribund real estate markets...