IMF raises forecast for global growth to 5.1%

The global economy is set for another year of strong growth, the International Monetary Fund (IMF) said yesterday, but it warned that rising inflationary pressures and a US economic downturn posed growing dangers.

In its twice-yearly World Economic Outlook, the IMF raised its 2006 forecast for global growth to 5.1 per cent from an April forecast of 4.9 per cent. It also predicted 4.9 per cent growth in 2007 versus a previous projection of 4.7 per cent. The IMF outlook comes a day before top policymakers from the Group of Seven rich nations arrive in Singapore to discuss the state of the world economy.

G7 economic leaders - who formally meet tomorrow - will debate the hot topic of Asian currencies, although officials have played down any prospect of fireworks over China's rigid currency policy or protracted yen weakness against the euro.

But global economic conditions, judging from the IMF's prognosis, remain favourable. The IMF said stronger growth in Europe and emerging nations should help offset US cooling.

It said the European Central Bank (ECB) should probably hike interest rates again to head off inflation at a time of healthy economic growth. The fund raised its forecasts for growth in the euro zone by nearly half of a percentage point to 2.4 per cent and predicted 2 per cent growth in 2007 across the 12 countries that share the currency.

That follows a 1.3 per cent rise in gross domestic product in 2005. The brighter outlook was mostly attributed to a rebound in Germany.

Foremost of IMF recommendations, however, was a hindsight endorsement of ECB rate hikes and an acknowledgement that it may need to further tighten the noose on credit, although it urged ECB president Jean-Claude Trichet to do so cautiously.

"Looking forward, further interest rate increases will likely be needed to maintain price stability over the medium term if the expansion develops as expected," said the report.

The IMF said underlying inflation was within acceptable bounds and labour costs were subdued. So the ECB should play the rate rise game carefully, the IMF said, partly because of the risk of pushing the euro's foreign exchange rate upwards, which can dent exports and stunt growth.