The IMF’s optimism on global growth rises further

The International Monetary Fund has revised upwards its already optimistic forecasts for global economic growth.*

The predicted rises come despite the impact of higher oil prices and natural disasters such as Hurricane Katrina.

In the April 2006 edition of its twice-yearly World Economic Outlook, it predicts growth of 4.9% in 2006 and 4.7% in 2007. These figures are respectively 0.6 percentage points and 0.3 percentage points higher than the corresponding forecasts in September 2005.

Much of the increase is accounted for by the expectation of faster growth in the developing world. China is expected to grow by 9.5% in 2006 and 9% in 2007 – respectively 1.3 percentage points and 1.0 percentage points higher than the previous forecasts. Indian growth is forecast at 7.3% and 7% – upward revisions of 1.0 and 0.5 percentage points.

Japan has the strongest upward revisions among the advanced economies, while Italy has the strongest downward revisions. America is predicted to grow slightly faster than forecast in 2006, but slightly slower in 2007. Financial market conditions are seen as highly favourable, with unusually low-risk premiums and volatility. Yield curves are flattening as short-term interest rates rise.

The IMF highlights three features in the world economy. The American current account continues to rise despite concerns about global economic imbalances, and inflationary pressures remain modest.

An unusual feature is that both emerging markets and corporations are large net savers (see IMF predicts excessive corporate savings to continue).

The IMF also identifies risks to the continuing strong performance of the global economy. The most immediate are high and volatile oil prices, as well as a tightening in financial market conditions.

Less likely, but potentially more problematic, are difficulties arising from global economic imbalances and an avian flu pandemic.

The main policy challenges facing the world economy include addressing global imbalances and ensuring that countries maintain sustainable medium-term fiscal positions.

It is also important that the preconditions are put in place for economies to take advantage of globalisation and support global growth.

* The April 2006 World Economic Outlook is available at www.imf.org.