The International Monetary Fund raised growth forecasts for most economies on Thursday as the global economy pulls out of a steep nosedive, but warned recovery faces stiff headwinds.
The IMF projected the global economy would shrink 1.1 percent this year and rebound to annualised growth of 3.1 percent in 2010, better than July forecasts of 1.4 contraction in 2009 and 2.5 percent growth in 2010.
"After a deep global recession, economic growth has turned positive, as wide-ranging public intervention has supported demand and lowered uncertainty and systemic risk in financial markets," the fund said in its semiannual World Economic Outlook (WEO) report.
The Washington-based institution released the report in Istanbul, ahead of October 6-7 annual meetings in the Turkish city with the World Bank.
The US economy, the world's largest, was recovering better than previously estimated, the IMF said, projecting a 2.7 percent decline this year and 1.5 percent expansion in 2010, compared with minus 2.6 percent and 0.8 percent, respectively.
In Europe, the pace of decline was moderating, with the 16-nation eurozone seen returning to growth of 0.3 percent in 2010, instead of the 0.3 percent fall projected in the July WEO update. Related article: Europe should maintain economic support
And emerging and developing economies were ahead of the pack on the path to recovery, forecast to clock growth of 5.1 percent in 2010, led by China and India, at 9.0 percent and 6.4 percent, respectively. Related article: India, China lead recovery
Driving the pick-up in global growth was the robust performance of Asian economies, underpinned by stabilisation or modest recovery elsewhere, the IMF said.
Other stimulative factors were a rebound in manufacturing, replenishment of inventories, returning consumer confidence and firmer housing markets.
The IMF credited strong public policies across advanced and many emerging economies that supported demand and reduced fears of a global depression for triggering the recovery from the steepest global drop in output and trade since World War II.
Nevertheless, the IMF cautioned that the data shows the rebound will be sluggish and "for quite some time, jobless," and credit will remain tight.
Global growth of around 3.0 percent in 2010 would be "far below" the pace before the financial crisis struck in 2007 and accelerated in September 2008 after the bankruptcy of Wall Street investment bank Lehman Brothers.
And during 2010-2014, a lacklustre pace of slightly above 4.0 percent was estimated, less than the 5.0 percent growth in the immediate pre-crisis years.
"Downside risks remain a concern. The main risk is that private demand in advanced economies remains very weak," the IMF economists wrote.
"Premature exit from accommodative monetary and fiscal policies is a particular concern because the policy-induced rebound might be mistaken for the beginning of a strong recovery," the 186-nation institution said.
A premature exit could stall the recovery, allowing deflationary forces to take root in a pernicious downward spiral of falling prices and demand as buyers delay spending in anticipation of further price declines, the IMF warned.
Credit constraints remain a significant barrier to growth, despite the hundreds of billions of public US dollars pumped into the financial system to unblock the gridlock.
Banks lack the capital to restore lending to levels that would support a sustained recovery.
The IMF estimates that global bank writedowns could reach 2.8 trillion US dollars for the period between mid-2007 through end-2010, with 1.5 trillion US dollars in losses yet to be recognised. The bulk of the losses occurred to US, British and eurozone banks. Related article: Sluggish US growth forecasted
Private sector credit is expected to contract or barely grow in the those areas during the rest of 2009 or the first part of 2010, the report said. Financing conditions for many businesses and consumers "will remain very difficult."
The IMF called on policymakers to take stronger action to increase bank capital and repair bank balance sheets, citing "only very partial progress" to date, and clearly define their exit strategies.
The fund said "a major overhaul" of the financial system was required, "which must not be jeopardised by growing confidence that the greatest crisis dangers are past, or fears that national competitive advantages might be lost, or concerns that first-best solutions are beyond reach for technical reasons."
The IMF was asked by the Group of 20 largest economies at their Pittsburgh summit last week to take a greater role in assessing members' policies to reduce the risk of another systemic crisis.