The global economy is expanding again and financial conditions have improved significantly, the International Monetary Fund (IMF) he said.

But in its latest World Economic Outlook, the IMF said the “pace of recovery is expected to be slow”.

It added that the recovery is likely to be “insufficient to decrease unemployment for quite some time”.

On Wednesday, the IMF cut its forecast for the amount that banks are likely to lose in bad loans and investments.

The total it expects banks to lose between 2007 and 2010 is now $3.4m (2.1 tn), down from its previous estimate of $4m.

The reduction is a direct result of the improved outlook for the global economy.

Separately, the head of the European Central Bank (ECB) said that the 16 countries in the eurozone should withdraw stimulus packages in the next two years.

“From an ECB point of view, it is important to do what is necessary to exit as soon as possible”, Jean-Claude Trichet said at a meeting of EU finance ministers and central bank governors in Gothenburg.

“it is important  in our view that it starts as soon as the recovery starts.

It is something which is essential for the recovery itself.

“I would say, in our view, at the latest in 2011”.

Recovery Risks

The global recovery is being led by Asia, where economies have  “withstood the financial turmoil much better than expected”, the IMF said.

IMF forecast 2009 / 2010

US        -    2.7% / 1.5%
Japan        -    5.4% / 1.7%
Canada        -    2.5% / 2.1%
UK        -    4.4% / 0.9%
Germany    -    5.3% / 0.3%
France        -    2.4 / 0.9
Italy        -    5.1% / 0.2%
Spain        -    3.8% / 0.7%
Source: IMF

But gains are now being seen in developed economies, where “financial market sentiment and risk appetite have rebounded”, it added.

Despite the improved outlook, however, the fund said there were a number of risks to the recovery.

It cited major government stimulus packages, central bank support and restocking by companies that have run down inventories as three temporary factors that “will diminish during the course of 2010”.

It also highlighted the fact that banks are being forced to hold more cash in reserve, which will limit the amount of credit available “for the remainder of 2009 and into 2010”.

With less money available to companies and individuals to borrow, and therefore invest, demand may be stifled.

Most serious, it concluded, was the fact that “private demand in advanced economies remain very weak”.

Increased Growth

The IMF predicts that the US economy will contract by 2.7 per cent in 2009, before growing by 1.5 per cent next year.

The eurozone, it thinks, will shrink by 4.2 per cent in 2010.

It has upgraded its forecast for UK economic growth to 0.9 per cent next year, up from a previous estimate of 0.2 per cent. This puts the

UK top of Europe’s leading economies for growth in 2010, alongside France.

The Germany economy, the IMF thinks, will grow 0.3 per cent next year, while the Spanish economy will shrink by 0.7 per cent.

The world’s fastest-growing economy in 2010 will be Singapore, which will expand by 4.1 percent, closely followed by Taiwan, Slovakia,

South Korea and Hong Kong, according to the fund.

In a related development the US economist widely credited with having predicted the financial crisis has warned we are already “planting the seeds of the next crisis”.

Nouriel Roubini told the BBC that he is concerned about the growing gap between the “bubbly and frothy” stock markets and the real economy.

Over the last six months, the Dow Jones Industrial Average has risen about 45%.

But Mr. Roubini says he sees an economy where consumers are “shopped out” and “debt burdened”.

Based on the run up in share prices in recent months, investors appear to be betting that good times are around the corner. A view not shared by Mr. Roubini.

“The crisis is not yet over”, the New York University professor said. “I think that there is a growing gap between what is the asset prices and the real economy”, Roubini stated.

“I see an ecomoy where the consumers are shopped out, debt burdened, they have to cut back consumption and save more.

“The financial system is damaged and for the corporate sector, I don’t see a lot of capital spending because there is a glut of capacity.”

Mr. Roubini believes US houses prices have further to fall, straining America’s fragile recovery.

‘Frothy Markets’

Property prices have already declined sharply. According to the National Association of Realtors, the national median has dropped almost 13 per cent from a year ago to $177,700 (110, 100).

Many believe the crises in the residential market could spread to the commercial real estate market causing more headaches for the banks.

So where does the “forth” in the markets come from?

Mr. Roubini – like many other economists – believes it is engineered by the Federal Reserve and the government which has been pumping cash into the economy to dampen the pain of the recession.

Source: BBC

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