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I.m.f. Raises Growth Forecasts For World Economy

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The good news is the world economy will grow faster than expected this year. The bad news is recovery remains overshadowed by major risks, and the pace of growth is likely to slow next year.

That was the thrust of the International Monetary Fund’s latest assessment of the global economy, which was released on Thursday.

“While we predict the recovery will continue, it is clear that downside risks have risen sharply,” Olivier Blanchard, the I.M.F.’s chief economist, said in a statement accompanying the organization’s latest report. “How Europe deals with fiscal and financial problems, how advanced countries proceed with fiscal consolidation, and how emerging market countries rebalance their economies, will determine the outcome.”

So far this year, growth has been stronger than widely expected, particularly in Asia and other emerging markets, prompting the I.M.F. on Thursday to raise its global growth forecast for 2010 to 4.6 percent. That is up from the 4.2 percent projection it had issued in April.

Overshadowing the recovery, however, is the lingering danger that the concerns over the high debt levels of several of the smaller European economies will escalate into a wider financial crisis, the I.M.F. cautioned.

Worries that Greece and several other European states might be unable to service their sovereign debt began to erode confidence in the soundness of banks in some euro zone countries this year, causing financial strains as banks became less willing to lend to each other.

The European debt jitters also caused global stock markets to tumble and the euro to fall sharply. Despite a modest recovery in recent weeks, the European currency is down nearly 12 percent against the U.S. dollar, and 16 percent against the Japanese yen since the start of the year.

“In the near term, the main risk is an escalation of financial stress and contagion, prompted by rising concern over sovereign risk,” the I.M.F. 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 exchange rates.”

In addition, the I.M.F. said growth is expected to slow during the second half of this year and into next year.

Advanced countries, for example, expanded an estimated 3 percent during the first half, the I.M.F. said, but the pace is expected to fall to only 2 percent during the second half of 2010, as growth in private demand slows.

The miracle recovery continues.

More VI ramping to get people spending and borrowing with confidence?

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4.6% is quite a fast pace. 2009 was the worst year in many decades and the world economy shrank something like 1%. I believe that was the first global negative year since WW2.

World development is back on pace.

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