IMF raises outlook for economies

The IMF’s chief economist, Olivier Blanchard, says there is up to a one-in-five chance that the eurozone could slip into a deflationary spiral as the fund upgraded global economic growth to 3.7% in its latest World Economic Outlook.

The improvement is based on the US economy gaining momentum. The forecast for the world’s largest economy has been raised to 2.8% from a previous forecast of 2.6%. The UK economy is also expected to growth at a much faster pace over the course of this year compared with last October. The forecast has been revised up from 1.9% to 2.4%.

“The euro area is turning the corner from recession to recovery. Growth is projected to strengthen to 1% in 2014 and 1.4% in 2015, but the recovery will be uneven,” the IMF said it in its report.

“The pickup will generally be more modest in economies under stress, despite some upward revisions including Spain. High debt, both public and private, and financial fragmentation will hold back domestic demand, while exports should further contribute to growth.”

In a conference call with reporters, Mr Blanchard said one of the biggest threats facing the eurozone was falling prices. He estimated that there was between and a 10%-20% chance of the area slipping into deflation. He urged the ECB to take all measures possible to boost domestic demand.

Overall, the IMF struck an upbeat tone with the world economy seen on the mend. The main roadblocks to the recovery such as austerity and a fragile financial sector are improving.

Over the past few years, global central banks have embarked on an unprecedented level of quantitative easing and easing up on monetary policy in order. Exiting these programmes still poses huge risks, said the IMF.

“With prospects improving, however, it will be critical to avoid a premature withdrawal of monetary policy accommodation, including in the United States, as output gaps are still large while inflation is low and fiscal consolidation continues. Stronger growth is needed to complete balance sheet repair after the crisis and to lower related legacy risks. In the euro area, the European Central Bank will need to consider additional measures toward this end,” it said in the latest report.

“Measures such as longer-term liquidity provision, including targeted lending, would strengthen demand and reduce financial market fragmentation. Repairing bank balance sheets through the balance sheet assessment exercise and recapitalising weak banks and completing the banking union by unifying both supervision and crisis resolution will be essential for confidence to improve, for credit to revive, and to sever the link between sovereigns and banks. More structural reforms are needed to lift investment and prospects.”