The World: IMF Seems Improvement

A more optimistic tone from the latest World Economic Outlook from the International Monetary Fund, with the chances of a global slump receding and an upgrade to growth prospects for some major economies, especially in 2013.

And even in gloomy Europe there's a small ray of hope with the recession expected this year and next not anticipated to be as deep as previously forecast.

The improvement helped send markets higher around the world, with Australia having its strongest day for months as investors rediscovered China and the resources boom story.

The Aussie dollar regained the $US1.04 level, despite the strong chance of a rate cut by the Reserve Bank on May 1.

The IMF revised up its global growth forecasts, with the global economy expected to grow by 3.5% this year, up from 3.3% in January.

A forecast of global growth of 4.1% next year is above the previous estimate of 3.9%.

Global growth continues to be underpinned by solid growth in Asia, the report said.

And while the IMF sees Australia growing at 3% this year unchanged, the 3.5% forecast for next year is slightly better than the 3.3% forecast at the start of this year.

In terms of our major markets, the IMF is more confident about China, and it's clear the group doesn't subscribe to the 'hard landing' theory that's popular with quite a few hedge funds and investors in the US, Europe and even parts of Asia.

China's economy is now expected to grow 8.2% this year and rise to an 8.8% rate next year, according to the Fund first World Economic Outlook for 2012, released yesterday.

India is expected to grow 6.9% in 2012 and 7.3% in 2013.

These forecasts were broadly unchanged from the IMF's January update and those from the Reserve Bank of India on Tuesday when it cut its key interest rate by a larger than expected 0.50%.

The Fund's forecast for China means it sees the country's economy as enjoying a soft landing (that is now quite clear after first quarter growth hit an annual rate of 8.1% in the three months to March).

Investment and private consumption remain strong in China, supported by solid corporate profits and rising household income, the IMF said in its latest World Economic Outlook report (WEO).

And, while the spillovers from the European debt crisis had damaged external demand, China's robust domestic demand helped offset the drag on growth from slowing exports.

And the fund sees China's consumer price inflation falling to around 3.3% this year (3.56% in March) after the 5.4% jump in 2011.

The Fund however said China faced continuing risks from balance sheet vulnerability (in financial and other groups) from the slowing real estate and export sectors.

"They appear manageable on their own, but a large external shock could bring these risks to the fore, precipitating a decline in investment and activity in China," it said.

With respect to the rest of Asia, the IMF said economic activity in the region slowed during the last quarter of 2011, reflecting both external demand decline and domestic developments.

Slowing exports, particularly to Europe, are dampening the region's growth prospects, it added.

(But recent data from Japan and China reveal an upsurge in exports to the US as its economic recovery gathers pace.)

The IMF says a soft landing is expected in the whole Asia region given robust domestic demand, favourable financial conditions and room for policy easing by central banks across the region.

The region is expected to see a growth rate of 6% this year, rising to 6.5% in 2013, thanks again to China's continuing strength.

The IMF also upgraded its 2012 economic growth forecast for Japan, predicting an expansion of 2% compared with the previous expectation of 1.7% announced in January.

The Fund said Japan is "recovering from the output losses in 2011 related to the earthquake and Thai floods".

It expects Japan's economy to grow 1.7% in 2013, compared with the previous forecast of 1.6%.

Japan's economy, the world's third largest, contracted 1.7% in 2011.

The IMF said it expects interest rates in Japan to stay close to zero for at least the next two years.

The report also warned it is urgent for Japan to get its fiscal house in order or run the risk of serious financial turmoil.

For South Korea, the Fund kept this year's growth forecast for the South Korean economy at 3.5%, but lifted it for 2012 to 4%.

The Fund said that South Korea can expect a rebound in construction to offset a muted outlook for private consumption and investment.

For India, while the growth forecasts given were those of the country's central bank, the Fund had a bit to say about the economy's problems.

While noting that India's growth remains one of the highest in the world, it pointed out that the country's economy has slowed more than most other emerging markets.

As well the economy is in need of structural reforms and lower inflation.

Investment is expected to pick up modestly from the slump recorded in late 2011, but exports are expected to weaken.

The IMF also expects inflation to decline in the near term, but will stay above the Reserve Bank of India's objective.

The IMF noted a major challenge for the country is to bring growth back to its potential while further lowering inflation, tasks which will require structural reforms and fiscal consolidation.

IMF directors said they agreed India's policy rates should be kept unchanged until inflation is clearly on a downward trend and encouraged the Reserve Bank of India to be ready to raise policy rates if inflation starts to rise again, though it could consider cutting rates if inflation momentum eases.

Because of the problems in Europe, activity will continue to disappoint for the advanced economies as a group, expanding by only about 1.5% this year and 2% in 2013.

Real GDP growth in the emerging and developing economies is projected to slow from 6.25% in 2011 to 5.75% this year and then to rise to 6% next year.

In the euro area, the numbers are -0.3% for 2012 and -0.9% for 2013.

The 2012 forecast is up from the -0.5% drop forecast late last year.

The negative forecast for the eurozone, for 2012 reflects negative growth of around 2% in countries such as Italy and Spain, and positive growth in Germany and France.

Britain will grow by 0.8% this year, the IMF said in its World Economic Outlook.

The forecast for the UK is now better than in January, when it was slashed to 0.6%, but worse than September's estimate of 1.6%.

Its 2013 growth forecast was unchanged at 2%.

The IMF says the US economy is expected to grow by 2.1% this year (1.7% actual in 2011), up 0.3% from its January projection.

"The U.S. economy has gained some traction, with growth improving through 2011 and signs of expansion in the job market," the IMF said in its latest World Economic Outlook.

"Risks to the outlook are more balanced but still tend to the downside given fiscal uncertainty, weakness in the housing market, and potential spillovers from Europe," it added.

"U.S. economic growth is projected at 2.1 percent in 2012 and 2.4 percent in 2013, reflecting ongoing weakness in house prices, pressures to deleverage, and a weak labor market," noted the report.

The global financial institution said although recent labor market outcomes have been promising, with unemployment falling to 8.2% last month, employment in the rest of 2012 and 2013 would only see modest increase.

The unemployment is projected at 8.2%, perhaps easing to 7.9% next year.

While urging the U.S. government to put public debt on a sustainable track over the medium term, the IMF said efforts should be made to support near-term recovery.

Moreover, supporting housing market should also be a priority, the Fund said.

"The adoption of the administration's proposals on mortgage refinancing would also be a step in the right direction," it noted.

And with Spain the major trouble spot for the global economy and especially Europe, the IMF's latest forecasts contain little joy.

The IMF said the Spanish economy would shrink by 1.8% this year, but could swing back to positive growth in 2013.

The Fund says the Spanish economy could grow by 0.1% in 2013, compared to a previous forecast of a 0.3% contraction in January, which is good news.

The country's deficits, in the meantime, would stand at about 6% of GDP by the end of 2012, and at 5.7% by the end of 2013, down from the IMF's previous prediction of 6.8% and 6.3%.

The figures are still way above the government's promised threshold of 5.3% in 2012 and 3% in 2013 and the gap indicated there's a lot more pain to come in Spain.

Unemployment would continue to be a major problem in Spain and by the end of this year would reach 24.2%, only easing marginally to 23.9% by the end of next year.

And Australia is expected to outperform the rest of the developed world this year and next, according to the IMF.

The Fund said it saw the Australian economy growing by 3% this year and 3.5% in 2013 as tensions from Europe and the US continue to ease.

But it also warned that Australia was exposed to risk if economic conditions in the Middle East caused another oil price spike. (That was also a factor for other regions, not just Australia.)

The IMF also forecasts Australia's unemployment rate to remain low at 5.2% in both 2012 and 2013.

The Reserve Bank of Australia has forecast the domestic economy to expand by an annual 3.5% to June 2012, according to its quarterly economic outlook released in early February.