The world economy is on course for a fifth year of solid expansion despite recent stock market volatility and the US downturn, the International Monetary Fund said yesterday.

In its twice-yearly World Economic Outlook, the IMF said share price falls in late February had been “more of a modest correction” than a fundamental change in market sentiment and that equities remained close to all-time highs.

Financial market buoyancy, a fall in oil prices since August’s peak of $77 a barrel and fading concerns about inflation put the world economy on track to grow 4.9 per cent this year and next, unchanged from the IMF’s September’s forecast but slower than last year’s 5.4 per cent.

Although this rosy picture could be threatened by factors such as a bigger than expected fallout in the US housing market or a sharp sell-off of risky assets were stock markets to slide, the IMF was less worried than at the end of last year. “Downside risks to the outlook seem less threatening than at the time of the September 2006 outlook,” it said, putting the chance of world growth falling below 4 per cent in 2008 at 20 per cent.

Simon Johnson, the fund’s new chief economist, said he saw no need for “heavy-handed intervention” to control the carry trade, in which investors borrow at low interest rates in yen to invest for higher returns elsewhere.

His comments prompted investors to push the yen to a new low against the euro, showing the international community is in no mood to express concern at Japanese currency weakness.

The fund cut its 2007 growth forecast for the US economy by 0.7 percentage points to 2.2 per cent, citing a sharper than expected downturn in housing. It also reduced its forecast for next year to 2.8 per cent.

While warning that the housing correction still has a way to run and had the potential to trigger a deeper and more prolonged slowdown or even a recession in the US, with potential spill-overs to other countries, its central view remained that a growth pause still seemed more likely than a recession.

The IMF increased its estimate for the euro area by
0.3 points in 2007 and 2008 to 2.3 per cent in both years, saying business confidence, falling unemployment and one-off factors such as the World Cup in Germany had propelled growth to its fastest pace in six years. “The latest growth numbers are very good, extremely encour­aging,” said Mr Johnson.

It also raised its forecast for the UK modestly to
2.9 per cent growth this year, slowing to 2.7 per cent in 2008. Estimates for growth in Japan, India, Africa, the Middle East and central and eastern Europe were also increased, in many cases owing to high commodity prices and good financial conditions. The IMF held to its September view that growth in China would reach 10 per cent this year, slowing to 9.5 per cent next.

The outlook comes ahead of the spring meeting of the IMF’s governing council in Washington this weekend, which will examine the state of the world economy and IMF reform proposals.

As usual, the IMF urged policymakers to make the most of benign conditions by pressing ahead with reforms to address structural imbalances and to put public finances on a stronger footing, given ageing populations in many economies.

It forecast a fall in the US current account deficit to 6 per cent of national income in 2007 – 1 point lower lower than in September’s Outlook – but saw it remaining at about 6 per cent in 2012.

“A number of trends – including the ageing of populations, rising resistance to increasing globalisation, and the environmental consequences of rapid growth – could undermine the buoyant productivity that has underpinned recent favourable outcomes,” it warned.

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