IMF warns of growing risks to global economic recovery

The risk of a global economic slowdown has risen markedly, but governments need to press on with fiscal tightening, according to the International Monetary Fund.

In its latest world economic outlook, the IMF warned that following a better than expected recovery in the first half of the year, renewed concerns around the banking system are denting confidence and throwing up difficult choices for policymakers.

Chief economist Oliver Blanchard said that he expects global growth to moderate next year, dropping from a projected 4.5% this year to 4.25% in 2011.

‘In the near term, the main risk is an escalation of financial stress and contagion,’ the body said. ‘This could lead to additional increases in funding costs and weaker bank balance sheets and hence to tighter lending conditions, declining business and consumer confidence and abrupt changes in relative exchange rates.’

The IMF’s comments come ahead of the European Central Bank’s publishing of its stress-testing results on July 23 with many investors ear-marking the date as a potential inflection point.

While highlighting the increased risks to the recovery, the IMF also emphasised the need for fiscal tightening rather than a return to quantitative easing.

‘Government policies in advanced economies should focus on credible fiscal consolidation—notably measures to enhance medium-run growth prospects, such as reforms to entitlement and tax systems,’ Blanchard said.

Taking the recovery region by region, the IMF is projecting the US to grow by 3.25% in 2011 with the eurozone delivering 1%, Japan close to 2.5% and emerging markets averaging 6.75%. Its projection for the UK for this year fell by 0.1% to 1.2% and by 0.4% down to 2.1% in 2011.