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IMF Predicts Global Economic Expansion in 2010

After struggling through the effects of a global recession, the world economy should expand 3.1 percent in 2010, the International Monetary Fund forecasts.

The fund’s prediction in its World Economic Outlook credited the improvement to determined crisis management in the United States, Europe and Asia. “The global economy appears to be expanding again, pulled up by the strong performance of Asian economies and stabilization or modest recovery everywhere,” according to the fund.

However, “premature exit from accommodative monetary and fiscal policies seems a significant risk, because the policy-induced rebound might be mistaken for the beginning of a strong recovery in private demand,” the fund cautioned.

The expansion is not expected to be uniform. China’s economy could expand 9 percent next year while the United States likely would grow 1.5 percent next year. Another so-called “advanced” economy, the 16-nation euro zone, can expect a marginal increase of 0.3 percent in 2010. By comparison, this year is expected to end with the U.S. economy shrinking 2.7 percent and the euro zone down 4.2 percent.

The monetary fund agrees with some economists who say an expansion would be fueled by mainly by inventories rebuilding. Add to that “some signs of gradually stabilizing retail sales, returning consumer confidence and firmer housing markets.”

However, a threat still remains as “unemployment rates are expected to remain at high levels over the medium term in a number of advanced economies,” the fund said. Vulnerability also remains. Events such as spiking oil prices, a swine flu pandemic and political events still pose threats, the fund said.

In an earlier interview, José Vinals, the fund’s director of monetary and capital markets, provided additional details on the state of the global economy. “Overall, the situation has improved, and we have gone from the verge of the financial meltdown to a situation of stability,” he said.

However, “the financial system is still not on safe ground. It still depends a lot on economic support – public policy measures – to function,” Vinals said. “So this means that we need to continue to address some basic problems that still are important.”

Major contributors to those problems are undercapitalized banks. The fund estimated banks will have write-downs worth $3.4 trillion due to the financial crisis. Still, that is less than the $4 trillion forecast in April.

Fund officials also warned businesses and households to control their debt. Americans already are seeing improvement in this area. According to the federal government reports, consumer credit fell at an annual rate of 10.4 percent in July as the personal savings rate increased 5 percent in the second quarter – the highest rate of the decade.

As for government debt, the fund expects its fast climb to continue until it reaches nearly 110 percent of the United States’ gross domestic product by 2014. That’s “a worrisome deterioration given looming health care and pension pressures related to population aging,” the fund cautioned.