The International Monetary Fund has upgraded its 2010 global growth forecast, due to robust growth in Asia and renewed US private demand. But the IMF signalled big risks to the recovery from Europe's debt problems.
The IMF raised its 2010 world output forecast to 4.6% from 4.2% previously, but said sovereign debt risks in Europe could escalate and drag on the global economy. The figures were in the latest updates of its World Economic Outlook and Global Financial Stability reports.
'Downside risks have risen sharply amid renewed financial turbulence. In this context, the new forecasts hinge on implementation of policies to rebuild confidence and stability, particularly in the euro area,' the IMF said.
Persistent weakness in the US housing and labour markets, euro zone debt problems and slowing manufacturing activity in Asia have made investors speculate that the global economy will slow sharply for the rest of the year.
The IMF cut its 2011 GDP growth forecasts for Britain, Canada, the euro zone, emerging economies and Japan.
The euro area's 2010 GDP was seen expanding by 1%, unchanged from the last forecast in April, though the 2011 GDP forecast was trimmed by 0.2 percentage points to 1.3%.
The 2010 US GDP growth forecast was raised to 3.3% from 3.15 previously, and the 2011 growth forecast was increased to 2.9% from 2.6%.
The biggest downward revision to GDP forecasts was in Britain, which last month unveiled a plan to cut a record budget shortfall to almost nothing in five years. The IMF expects 2010 GDP growth of 1.2%, down 0.1 percentage points from a previous forecast, and 2011 GDP to rise 2.1%, down 0.4 points.
While uncertainty about bank regulation has added to investor concerns, the IMF focused the majority of both reports on the implications of the euro zone sovereign crisis.
Under one scenario that assumed shocks to the global financial system resulting from Europe's debt problems would be as great as those experienced in the wake of Lehman Brothers' failure in 2008, world GDP growth in 2011 would be reduced by 1.5 percentage points.
The fund said the most prominent policy challenge was to restore financial market confidence without choking recovery.
