IMF raises world economic targets

Developed economies face slowing demand and rising energy costs

The International Monetary Fund (IMF) has raised its global economic forecast after the impact of a credit crunch was not as severe as had been first feared.

The IMF said it now expects the global economy to grow 4.1% in 2008, up from an initial forecast of 3.7% in April. That compares with 5% growth in 2007.

Despite upgrading forecasts for the UK and US, the IMF warned that the global economy remained in a "tough spot".

Policymakers need to balance growth, while dealing with inflation, it said.

"The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere, notably in emerging and developing countries," the IMF said in an update to the World Economic Outlook it published in April.

Revisions

"The top priority for policymakers is to head off rising inflationary pressure, while keeping sight of risks to growth."

2008 GROWTH FORECAST Global economy to grow 4.1% US to grow 1.3% Japan to grow 1.5% UK to grow by 1.8% China to grow 9.7% Source: IMF

The comments from the IMF may go some way to easing concerns that many of the world's largest economies are heading for a prolonged recession, brought on by problems in the US housing market and the subsequent credit crunch.

Based on its new calculations, the IMF expects the UK economy to grow by 1.8% in 2008 and 1.7% in 2009 - up from a previous forecast of growth of 1.6% in both years.

The UK government has forecast growth of 2% this year and 2.5% in 2009.

According to the IMF, the US economy is also expected to perform better than initially forecast.

IMF's Simon Johnson assesses the US economy

The IMF expects US growth of 1.3%, up from an April forecast of 0.5%.

However, it warned that the US economy was projected "to contract moderately during the second half of the year".

Inflation fears

The IMF added that risks to the world economy from the financial sector remained elevated and said inflation was an increasing concern.

"Inflation is mounting in both advanced and emerging economies, despite the global slowdown," the IMF said in its report.

It also pointed out that central banks and governments were having to juggle the twin problems of slowing economic growth and surging inflation, driven by record oil prices and higher food costs.

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"Policymakers face a very difficult environment," the IMF said.

"They need to head off rising inflationary pressure, while also being mindful of downside risks to growth."

On the positive side, the IMF said that demand in advanced and emerging economies might be more resilient than first thought to recent jumps in commodity prices, and be able to resist shocks from the financial sector.