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IMF raises global growth forecast to 3.5%

21 April 2012 No Comment

The International Monetary Fund expects the Australian economy to expand by three per cent this year as tensions emanating from Europe and the United States continue to ease.

While the 2012 forecast for Australia is unchanged from an IMF briefing note issued in January, it comes as the threat of a sharp global economic slowdown recedes and activity in the United States rises.

The forecast is down from the 3.3 per cent growth forecast in the previous half-yearly world economic outlook report published in September last year. Even so, the IMF’s 2012 forecast does reflect a solid rebound from actual growth in 2011.

In its latest World Economic Outlook, the IMF says that after a major setback last year, the world outlook is gradually improving, even though downside risks remain.

The IMF also says Australia is in a region where exposure to troubled euro area banks is less than for other parts of the world, but warned that another external risk for Australia is the chance that tensions in the Middle East cause another oil price spike.

Global outlook improves

The solid performance expected from the Australian economy comes amid a rosier outlook for global growth as the threat of a eurozone meltdown gradually recedes.

The IMF estimated global growth at an annual rate of 3.5 per cent this year, accelerating to 4.1 per cent in 2013. The forecasts reflected an upgrade from the January forecast of 3.3 per cent and 4.0 per cent, respectively.

“The outlook for the global economy is slowly improving again but is still very fragile,” the IMF said in a twice-yearly report.

China continued to be the global driver. The world’s second-largest economy was forecast to grow at 8.2 per cent, picking up to a robust 8.8 per cent in 2013.

Despite the blow to its export industries due to “spillovers from Europe”, China’s economy would post strong growth thanks to “robust” domestic consumption and investment.

The improved forecast arose in part from better global financial conditions and easing fears about the eurozone debt crisis.

Reconstruction in Japan and Thailand, following natural disasters, also helped to foster growth in Asia.

“Policy has played an important role in recent improvements, but various fundamental problems remain unresolved,” said the IMF, considered the global lender of last resort for troubled member countries.

The fund cited the European Central Bank’s pumping cash into the eurozone banking system, the expansion of a eurozone firewall to contain the debt crisis and structural reforms aimed at restoring financial health.

In the United States, an extension of payroll tax relief and unemployment benefits averted excessive fiscal tightening that would have damaged the US economy.

Growth in the US, the largest economy, was now seen at 2.1 per cent this year and 2.4 per cent the following year, up from the prior estimates of 1.8 per cent and 2.2 per cent, respectively.

“The main concern is that the global economy will continue to be susceptible to major downside risks… and that the recovery will remain anemic in the major advanced economies,” the IMF said in its World Economic Outlook report.

“These challenges call for more policy action, especially in advanced economies,” and include “resolving the euro area crisis without delay.”

“The first priority for US authorities is to agree on and commit to a credible fiscal policy agenda that places debt on a sustainable track over the medium term,” the IMF said in a warning to bickering policymakers.

The report comes ahead of the IMF’s spring meetings with its sister institution, the World Bank, that open this week in Washington.

The IMF raised its growth estimate for the advanced economies to 1.4 per cent for 2012, including a contraction of 0.3 per cent in the 17-nation eurozone.

Growth would pick up to 2.0 per cent in 2013, when the single-currency bloc was expected to post a 0.9 per cent recovery rate.

“The WEO projections assume that policymakers will prevent a Greek-style downward spiral from taking hold of another economy on the euro area periphery,” the IMF said.

The outlook sees financial stress remaining volatile and falling “only gradually.”

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