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IMF sees faster growth but recovery still at risk

JOHANNESBURG, Jan 25, 2011 – The International Monetary Fund said on Tuesday the global economic recovery was gaining traction but warned that it was "still at risk" because of eurozone debt and a lack of financial reform.

The Washington-based institution said the two-speed global recovery — with advanced economies growing significantly more modestly than emerging economies — was shifting gears as the United States and Japan saw rising consumption.

The IMF projected the global economy\’s output would expand by 4.4 percent in 2011, slightly higher than 4.2 percent annual rate projected in the fund\’s October projection.

Its latest updates, released in Johannesburg, South Africa, highlighted an improving but mixed global economic picture.

"In advanced economies, activity has moderated less than expected, but growth remains subdued, unemployment is still high, and renewed stresses in the euro area periphery are contributing to downside risks," the IMF said.

"This reflects stronger-than-expected activity in the second half of 2010 as well as new policy initiatives in the United States that will boost activity this year," it added.

The annual pace of growth, however, would still be slower than the 5.0 percent seen in 2010. Bank funding remains volatile, Jose Vinals, the IMF\’s director of monetary and capital markets, told reporters in Johannesburg.

"More than two years after the onset of the financial crisis, global financial stability is still not assured. It is still at risk," he said.

"Banks face significant funding needs now and over the next two years. In many advanced economies, we need to deal with the legacy of the crisis by resolving financial fragilities once and for all," he added.

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The IMF said a new US fiscal package passed in late 2010 was expected to boost growth in the world\’s biggest economy by 0.5 percent.

The US economy had the sharpest markup by far: a 0.7 point gain to GDP growth of 3.0 percent in 2011.

Olivier Blanchard, the IMF\’s director for research said faster appreciation of the yuan would benefit the global economy.

"It would be a good thing for China and for the rest of the world," he said in Johannesburg.

"China is moving in the right direction. It is focusing on increasing domestic demand. We think that sooner or later it will be the logical thing and the reasonable thing to appreciate."

There was no change in the 1.5 percent growth forecast for the 17-nation eurozone or for Japan, where 1.5 percent growth is predicted.

Growth in emerging economies remained "buoyant" but inflation pressures persist and there are signs of overheating in part from capital inflows as investors chase higher yields.

Growth in the top two Asian engines, China and India, was unrevised at 9.6 percent and 8.4 percent, respectively.

Sub-Saharan Africa is predicted to produce the strongest growth of any region, at 5.8 percent.

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Policymakers in the emerging economies, which account for more than two-thirds of global growth, should take steps to keep overheating pressures in check, the 187-nation institution said.

The IMF also warned of risks from the financial and debt crises in eurozone countries such as Greece and Ireland, amid tepid progress in financial reforms.

"The most urgent requirements for robust recovery are comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area and policies to redress fiscal imbalances and to repair and reform financial systems in advanced economies more generally," it said.

The IMF also called for stepped-up eurozone financial support for member countries in need, and better stress tests on banks.

"Markets remain skittish about potential losses in the region\’s banks and have not been assuaged by stress tests conducted to date."

The IMF forecast commodity prices would remain high in 2011 in response to strong global demand and it hiked its oil price per barrel estimate to nearly $90, from the October number of $79, citing robust demand.

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