The world economy is recovering faster than expected but Europe's debt crisis has increased financial risks and governments urgently need to rebuild shaky public confidence, the International Monetary Fund said Thursday. The Washington-based IMF raised its 2010 world growth forecast to 4.5 percent from 4.1 percent in April. Its US growth forecast rose from 2.7 percent to 3.3 percent. The outlook for the European nations that use the euro common currency was unchanged at 1 percent. But in its quarterly World Economic Outlook, the IMF warned that “risks have risen sharply” due to Europe's financial turbulence. It said European leaders need to act quickly to resolve debt problems and restore confidence in their banks. Europe's debt risks are “threatening to spill over to other regions” and reverse recent gains, the agency said in a separate Global Financial Stability Report. Global economic indicators stabilized at a high level in May, with industrial output and trade posting double-digit growth, the agency said. It said there was a modest but steady recovery in developed economies and strong growth in emerging nations. Asian economies recovered strongly this year, driven by buoyant exports and stronger domestic demand, the IMF said. The agency raised its 2010 growth forecast for China to 10.5 percent from 10 percent in April, for Japan to 2.4 percent from 1.9 percent and for India to 9.4 percent from 8.8 percent. The estimate of the region's growth rose to 7.5 percent from 7 percent. However, it warned that any slackening in Europe's recovery “would affect Asia through both trade and financial channels.” Weak data from major economies in recent weeks have diminished confidence in a strong rebound from last year's recession. The IMF said European leaders must act quickly to rebuild confidence. It said they must resolve uncertainty about banks' exposure to government debt and other risks and make sure lenders have enough capital and markets have adequate liquidity. It said many advanced economies urgently need to push ahead with financial system reforms including recapitalizing banks, restructuring and consolidating banking industries and overhauling regulation. “In the absence of complete banking sector recapitalization and restructuring, the flow of credit to the economy will continue to be impaired,” the IMF said. In the near term, it said, the main risk was an escalation of financial stress and contagion, prompted by rising concern over sovereign risk – the prospect of governments reneging on borrowing terms. This could lead to additional increases in funding costs and weaker bank balance sheets that induce tighter lending conditions, declining business and consumer confidence, and abrupt changes in exchange rates, the IMF said. “At this juncture, the potential dampening effect on growth of recent financial stress is highly uncertain,” it said, adding that so far, there was “little evidence of negative spillovers to real activity at a global level.” The new economic forecasts hinged on implementation of policies to rebuild confidence and stability, particularly in the euro zone, the report said. The IMF called on advanced economies to focus on “credible fiscal consolidation” supported by accommodative monetary conditions and financial sector and other reforms to enhance growth and competitiveness. Emerging economies, on the other hand, were urged to implement structural reforms and, in some cases, greater exchange rate flexibility, in an apparent reference to international calls for China to allow its yuan currency to trade more freely. Downside risks to growth in advanced economies could also “complicate macroeconomic management” in some of the larger, fast-growing economies in emerging Asia and Latin America, which faced some “risk of overheating,” the IMF said. “Against this uncertain backdrop, the overarching policy challenge is to restore financial market confidence without choking the recovery,” it said. In 2010, the United States, the world's largest economy, was expected to grow by 3.3 percent, the euro zone by 1.0 percent and developing Asia by 9.2 percent. In Latin America, Brazil is expected to spearhead growth at 7.1 percent and Mexico at 4.5 percent.
