The International Monetary Fund is more optimistic about the global economy after seeing faster U.S. growth and a coordinated effort in Europe to address the Continent’s debt crisis.
The global lending organization said Tuesday that the U.S. economy should expand 2.1 percent this year. Europe likely will shrink 0.3 percent and the world economy should grow 3.5 percent. All three of the IMF’s estimates are slightly better than its January forecasts.
The group praised European leaders for bulking up its bailout fund and taking other steps to address the crisis. The 17 countries that use the euro currency should emerge from a shallow recession later this year, the IMF said.
The IMF said the crisis continues to loom as the biggest threat to the global economy.
“With the passing of the [European] crisis, and some good news about the U.S. economy, some optimism has returned,” IMF chief economist Olivier Blanchard said. “It should remain tempered.”
The IMF’s World Economic Outlook report comes as the 187-nation organization and its sister lending institution, the World Bank, prepare to hold their spring meetings in Washington this week.
The report represents improvement from January, when IMF officials warned that the global economic recovery was in danger of stalling.
Since then, European leaders have worked together on a plan intended to restrain deficit spending. New governments in Spain and Italy have committed to reforms and spending cuts. And the European Central Bank has lent more than $1 trillion to the region’s banks. That has brought down borrowing costs in some of the most troubled countries.
In the U.S., consumers are spending more, business investment has grown and the job market has shown “signs of life,” the report says.
Mr. Blanchard said recent steps to boost Europe’s bailout fund to about $1 trillion are important but that alone cannot solve the crisis.
One key challenge for Europe is balancing the need to cut government budget deficits without choking off growth, he added. This is made more difficult by investors, who demand deficit cuts but react badly when such cuts reduce growth. Spain is struggling with this challenge at the moment, Mr. Blanchard said.
“It’s quite like you’re damned if you do, damned if you don’t,” he said.
Still, “the right strategy is the same as before,” he said. Governments need to make short-term cuts to establish credibility. But they should primarily focus on long-term commitments that decrease trend spending and put in place rules that reduce deficits over time, he said.
The risk that Europe’s debt crisis could worsen remains high, he noted. And even if it does not, growth in most advanced economies is likely to remain slow.
A separate report from the IMF forecast that Spain and Italy were likely to miss their budget deficit targets for this year. Spain’s deficit will equal 6 percent of its economy, the fund said in its Fiscal Monitor report. That’s above its target of 5.3 percent.
Italy’s deficit will reach 2.4 percent of its economy this year, above its 1.2 percent target.
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