IMF hikes 2010 growth forecast to 2.5%

The International Monetary Fund on Wednesday raised its 2010 global economic growth forecast by 0.6 point, to 2.5 percent, but said recovery from recession would be sluggish.

The updated IMF forecast was marginally worse for 2009, showing a contraction of 1.4 percent across the global economy.

"The global economy is beginning to pull out of a recession unprecedented in the post-World War II era, but stabilization is uneven and the recovery is expected to be sluggish," the IMF said in an update to its semiannual World Economic Outlook (WEO).

"Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating, although to varying degrees among regions.

"Despite these positive signs, the global recession is not over, and the recovery is still expected to be slow, as financial systems remain impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings."

The IMF projected global trade volume would plunge 12.2 percent this year, a sharp 1.2 points more than forecast in the April WEO.

Trade would grow 1.0 percent in 2010, a gain of 0.4 point from the prior forecast.

Advanced economies, however, were expected to remain in a slump into next year, and were "projected not to show a sustained pickup in activity until the second half of 2010," the IMF said.

Among the major economies, the United States and Japan were projected to grow more strongly than expected.

For the US, the IMF pointed to improvements in the labor and housing markets, industrial production, and business and consumer confidence.

"These developments are consistent with stabilization of output during the second half of 2009 and with a gradual recovery emerging in 2010," it said.

The IMF projected the world's biggest economy would shrink 2.6 percent in 2009, two-tenths of a point less than the prior estimate, and grow 0.8 percent in 2010, instead of the zero growth previously forecasted.

It sharply hiked its outlook for Japan to 1.7 percent in 2010, up a hefty 1.2 points. Growth this year in the second-largest economy was estimated at a negative 6.0 percent, instead of the 6.2 percent contraction previously forecast.

In a separate update on financial stability, the IMF said that financial conditions have improved, "as unprecedented policy intervention has reduced the risk of systemic collapse and expectations of economic recovery have risen."

However, it warned that vulnerabilities remained and "complacency must be avoided."

"Because much of the improvement in financial conditions is due to the robust rally in risk assets since March, there is a risk of a significant market setback if financial markets get too much ahead of the pace of economic recovery," the IMF said in its update of its Global Financial Stability Report.

The multilateral institution emphasized that the "extreme uncertainty" in the financial system which prevailed in late 2008 and continued into 2009 could re-emerge "if a major correction in asset prices were again to undermine confidence in financial institutions."