IMF predicts modest growth as Europe starts to exit recession

The International Monetary Fund expects growth to accelerate later this year as Europe begins to exit a “shallow recession” and U.S. performance improves, the fund reported in a study that helped buoy stock markets worldwide.

The newest edition of the World Economic Outlook did not declare an end to Europe’s crisis. Quite the opposite. The IMF said the situation remains uncertain and warned that any number of possible events could reverse recent progress. Among the chief risks: fiscal austerity programs that go too far, too fast and undermine growth; a rapid rise in oil prices; or a “downward spiral” that forces another bailout of a European country, such as Spain or Italy.

But the generally positive remarks about an improving global economy and increasing “traction” in the United States helped push the three major Wall Street exchanges up by 1.5 percent or more. European exchanges registered even stronger gains.

Overall world growth in 2012 is expected to be about 3.5 percent — slightly less than it was in 2011, largely because of the drag that Europe’s problems created beginning in the fall. The forecast, however, is stronger than the one the IMF issued in January. In 2013, the fund expects growth to reach more than 4 percent.

“For the last six months, the world economy has been on what is best described as a roller coaster,” IMF economic counselor Olivier Blanchard said. “Things have quieted down . . . but an uneasy calm remains. At any moment, it seems, things could get bad again.”

U.S. growth is expected to be 2.1 percent for 2012, increasing to 2.4 percent in 2013. The euro zone is expected to contract by a slight 0.3 percent this year and grow by just 0.9 percent in 2013. Several of the region’s economies — notably Italy’s — are expected to continue to contract.

“The outlook for the global economy is improving again but is still very fragile,” the fund concluded in the document, one of several major reports it is issuing before semiannual meetings this weekend. “The U.S. economy has gained some traction” and is poised to do even better next year, the fund said.

As in prior versions of the World Economic Outlook, this one is marked by a gap between projections for the industrialized world and for the emerging markets of Asia, Latin America and Eastern Europe. Although growth in emerging areas has slowed, it is expected to hit 5.7 percent this year and accelerate to 6 percent in 2013 — with India and China posting faster gains, in excess of 7 percent and 8 percent respectively.

The slowdown in the emerging world is welcome in one regard: In a separate report, the fund documented a recent drop in China’s overall surplus and said it expects that to remain lower in coming years, a long-sought goal as the country invests and spends more locally.

But lethargic growth in the developed world remains a concern, particularly with the unemployment rate in some European nations stuck at historic levels at a time when governments have little room in their budgets to respond with increased social spending.

“Job creation in these economies will likely remain sluggish,” the fund’s report noted. The IMF and others have called for structural changes in those economies, particularly those of Italy and Spain, to encourage job creation. But the new policies have been politically difficult to create; it will take time before their impact is felt.

The report sets a more temperate mood than the one evident at IMF meetings in the fall. Those sessions were dominated by concern that Italy or Spain might need a bailout that would tax the world’s ability to respond, or that the problems in Greece might force it to abandon the euro — with unpredictable consequences for the regional and global economies.

The risks from Europe remain large enough that the fund is pushing to add as much as $600 billion to its war chest to ensure that it could respond if things take a turn for the worse. The fund has about $400 billion available.

On Tuesday, Japan said it would make an additional $60 billion available if needed, while Denmark, Norway and Sweden combined to provide $26 billion. That comes on top of $200 billion that European Union nations have said they would provide. The extra money is likely to take the form of standby credit lines that the IMF could draw from.

The Obama administration, wary of an election-year fight with Congress over IMF funding and adamant that the fund has enough money, has said it will not contribute.

IMF Managing Director Christine Lagarde said the contributions demonstrate “these countries’ enduring commitment to multilateralism.”

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