IMF says world is pulling out of recession

The world economy is starting to pull out of recession, the International Monetary Fund said on Wednesday, marking up its growth forecasts for next year and hinting that it might reduce its estimates for bank losses.

"The recovery is coming," said Olivier Blanchard, IMF chief economist. But he cautioned “it is likely to be a weak recovery” and said policy-makers needed to guard against ongoing economic and financial risks. However, investors signalled their doubts about the strength of any economic recovery by selling off commodities, notably oil and gold, and stocks.

The yen, a barometer of risk aversion, also shot up 3 per cent against the euro and the dollar. Since the release of a much weaker-than-expected US jobs report for June last week, investors’ appetite for risky assets has soured.

"When we do get a recovery, it will be pretty anaemic,” said Jay Mueller, portfolio manager at Wells Capital. “The third quarter will be tough and the fourth does not look much better. People who had been optimistic that the economy has bottomed are rethinking... since last week’s jobs report."

The IMF now forecasts global growth of 2.5 per cent next year, up from 1.9 per cent in April, led by strong growth in China and India, a rebound in Japan and positive but sub-trend growth in the US. It upgraded its forecasts for Europe too, but still expects the eurozone to contract 0.3 per cent next year, with Germany declining 0.6 per cent.

The Fund inched down its forecast for global growth this year to minus 1.4 per cent.

The IMF did not update its estimates for losses facing banks. However, José Viñals, IMF financial counsellor, said it would be reasonable to guess that the figures would end up being lowered. He said markdowns on securities “would be likely to be somewhat better now” following the improvements in financial markets.

However, the IMF warned against complacency, saying it was too soon to implement "exit strategies” and highlighting several risks to recovery. It urged further efforts to clean up the banking system, noting that “bank capitalisation remains a concern, notably in Europe”.

The Fund also signalled concern that governments on both sides of the Atlantic had only “limited” success in dealing with problem assets.

Mr Blanchard said governments should prepare for the possibility that further stimulus could be needed. “It may be that private demand is going to be very weak for longer than we anticipated. In that case the fiscal stimulus in some form will have to be continued.”

---- from Financial Times