The International Monetary Fund issued a rosier outlook for the global economy in its latest World Economic Outlook, published on Tuesday, than its previous edition in September. The WEO is typically prepared twice a year and is the main instrument of the fund’s global surveillance activities.
“After suffering a major setback during 2011, global prospects are gradually strengthening again,” the fund wrote. “However, the recent improvements are very fragile… downside risks continue to loom large.” Compare that with September, when the IMF warned that the global economy was in a “dangerous new phase” as global activity weakened, confidence tumbled and downside risks grew.
The IMF raised its projections for U.S. output from its January 2012 update of the September WEO, from 1.8 percent to 2.1 percent in 2012, and from 2.2 percent to 2.4 percent in 2013.
The euro zone, which the IMF expects will enter a “mild recession” in 2012, poses the most immediate risk to global recovery, the report found. The problems in Europe are expected to subdue growth in all of the advanced economies. And if policymakers don't take action, the IMF warned, the euro-zone crisis could flare up again.
The IMF also stressed the need for U.S. policymakers to prevent sizable fiscal tightening in 2013 when the Bush-era tax cuts, payroll tax and unemployment benefits expire and to set a sustainable fiscal consolidation path for the medium term.
Another risk to the global economy is geopolitical uncertainty, which could cause oil prices to spike and global output to fall, the report’s authors warned. Excessively tight macroeconomic policies in the major economies could also result in deflation or weak activity.
But growth could surpass the IMF's projections if policies improve, financial conditions ease further and geopolitical tensions diminish, the report said.