While noting that the world recovery is battered by financial shocks, IMF's latest projection for global growth is revised upto 4.5 per cent in 2010 and 4.25 in 2011 (corresponding to 3.6 and 3.4 per cent based on market exchange rates). Global trade volume is expected to grow higher at 9 per cent (against earlier 7 per cent) and the data assume higher growth in imports than exports in emerging and developing economies. But oil price average would be around 75 dollars a barrel as against the average rice of 69 dollars in 2009, according to IMF, which means negative impact on developing country trade balances.

What is significant in the latest IMF appraisal is that there is greater emphasis on “credible fiscal consolidation” in advanced economies (no matter the magnitude of the job crisis with some 47 million unemployed in the richer world alone), than the implied note of caution about gradual withdrawal of stimulus in its paper to the Toronto G-20 Summit in June. IMF calls for measures that would enhance medium-term growth prospects, such as reforms to entitlement and tax systems.

Also a renewed emphasis on financial sector and structural reforms, which would complement “fiscal actions supported by accommodative monetary conditions” for enhanced growth and competitiveness. The Update acknowledges that financial turbulence (especially in euro area) could spill over to real economy through several channels involving changes in domestic and external demand and in relative exchange rates. Bank credit could be curtailed by “hidden uncertainty“ about financial sector exposure to sovereign risk as well as increased funding costs, notably in Europe.

IMF has worked its estimates on the basis of a 5 per cent growth in world economy in the first quarter of 2010, mostly due to robust demand in Asia, and encouraging signs of growth in private demand. Industrial production and trade posted double digit growth in the first five months with improving consumer confidence and “resumption” of employment growth in some advanced economies.

On the same day, the OECD (club of advanced nations) in its World Employment Outlook spoke of the need to create 17 million jobs to get employment levels back to where they were before the 2008-09 crisis. Unemployment may have peaked in the OECD area, having reached 8.6% in May 2010, but creating jobs has to be a “top priority for governments,” said OECD Secretary-General Angel Gurría.

Cutting unemployment and fiscal deficits at the same time is a daunting challenge but it needs to be tackled head on. “High joblessness as the new normal can not be accepted and has to be tackled by a comprehensive policy strategy,” he said. The United States has to create nearly 10 million jobs, mostly lost in the two-year recession. According to IMF analysis for G-20 leaders in Toronto, with greater policy cooperation by all countries, world growth could be boosted by 2.5 percentage points over five years - creating 30 million new jobs.

Overall, the WEO forecast continues to be consistent with a modest recovery in advanced economies, albeit with substantial differentiation among them. Challenging the recovery in these economies are high levels of public debt, unemployment, and in some cases, constrained bank lending. Key emerging economies in Asia and in Latin America continue to lead the recovery. Projections for calendar years 2010 and 2011 are for advanced economies 2.6 and 2.4, USA 3.3 and 2.9, Euro area 1.0 and 1.3, and Japan 2.4 and 1.8 respectively.

Emerging and developing economies are now projected to grow by6.8 and 6.4 for the two years. In Asia, economic activity has been sustained by continued buoyancy in exports and strong private domestic demand. Upward projection for Asian region is 7.5 per cent this year, IMF expects China to grow 10.5 per cent before slowing to about 9.5 per cent in 2011. For India, growth is expected accelerate to about 9.5 per cent in 2010, “as robust corporate profits and favourable financing conditions fuel investment, and then to settle to 8.5 per cent in 2011.”

In the event of external demand shocks, IMF says, large demand bases in some Asian economies (China, India, Indonesia) could provide a cushion to growth. There would be significant contagion effects from a Europe-wide credit event through bank funding and corporate finances, especially in regional economies more dependent on foreign currency financing (like India). Global risk aversion could also precipitate capital outflows from the region and weaken equity valuations. Economies with further policy manoeuvre could delay planned withdrawal of monetary and fiscal stimulus in order to mitigate adverse spillover to the real economy, IMF said.

In sum, according to IMF, monetary and exchange rate policies of countries should support global demand rebalancing. Such rebalancing together with key structural reforms are both essential to support future growth. (IPA Service)