World Recovery Continues, But Risks Increase, Says IMF

IMF forecasts continuing global recovery

But renewed financial turbulence and euro area problems cloud the outlook

Fiscal consolidation should be based on credible medium-term plans

But despite the stronger than expected first half recovery, the IMF warned that uncertainties surrounding sovereign and financial sector risks in parts of the euro area could spread more widely, posing difficulties for both financial stability and the economic outlook.

“While we predict the recovery will continue, it is clear that downside risks have risen sharply,” Olivier Blanchard, the IMF’s chief economist, told reporters. Blanchard and José Viñals, respectively the Fund’s Economic and Financial Counselors, launched updates to the IMF’s World Economic Outlook (WEO) and Global Financial Stability Report (GFSR) in Hong Kong for the first time.

Differences in performance

As always, these world growth rates hide a large difference between and within advanced and emerging and developing economies, with the United States expected to grow at about 3 ¼ percent in 2010, the euro area at 1 percent, Japan at close to 2 ½ percent, and emerging and developing economies averaging about 6 ¾ percent (see table below).

Also, the overall numbers do not reveal an important difference between the first and the second half of this year. For advanced countries for example, growth in the first half is forecast to be 3 percent, while growth in the second half of the year is forecast to be only 2 percent, reflecting a slowdown in private demand growth, Blanchard pointed out.

Viñals--speaking to journalists at a press conference hosted by the Hong Kong Monetary Authority on the 56^th floor of the International Finance Center overlooking the spectacular Hong Kong harbor--emphasized that “progress toward global financial stability has recently experienced a setback.” Sovereign risks have materialized in parts of Europe, especially Greece, that have eroded confidence in the soundness of banks in some euro area countries, resulting in an increase in funding and liquidity stress in interbank markets because banks are less willing to lend of each other.

Spotlight on policy implementation

In its market update to the GFSR, the IMF points to restoring progress toward financial stability to contain the risks and keep the economic recovery on track. Rapid implementation of stabilization measures taken by the euro area government authorities will be a key component in calming...