The International Monetary Fund has raised its global growth forecasts for the first time in nearly two years.
There is still a lot of caution when it comes to these forecasts – of course the IMF was one of the key global institutions to misread the signs of a global meltdown more than five years ago.
Even so, the IMF sees global growth of 3.7 per cent this year – that is up 0.1 percentage points on its last forecast in October – before moving to 3.9 per cent in 2015.
This confidence is being driven by the continuing recovery in the United States, especially after a budget deal was struck late last year between the US Congress and the White House.
The IMF does see China’s growth falling back slightly in 2015 to 7.3 per cent, but emerging economies appear to be getting the most benefit from the renewed confidence, with growth expected to rise from 4.7 per cent to 5.7 per cent this year.
However, the IMF is warning central banks against responding to the nascent recovery by raising interest rates too soon.
The IMF thinks the recovery is still pretty fragile and coming from a low base, and the IMF’s concern is that any premature move by central banks to raise rates could derail a recovery.
The fund’s chief economist Olivier Blanchard appears to be most worried about low inflation becoming deflation, but he says Europe remains particularly exposed to central bank movements given that the debt crisis is far from resolved.
“Are they out of danger? No, I think they are still in the danger zone. There are some good developments and some slightly worrisome developments – on the export front, exports are doing well in some of these crisis countries, that’s very good news,” he told reporters.
“But internal demand is very weak, and that’s due to interest rates which are still very high. I mean if you want to borrow in countries like Spain or Portugal you have to borrow at very high rates, so this leads to low activity which leads to weaker banks. They have a hard time getting out of that bad loop.”