Recession easing, recovery fragile: IMF

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Washington: The global economy is slowly starting to pull out of its deepest recession since World War Two but a recovery will be sluggish and policies need to remain supportive, the International Monetary Fund said on Wednesday.

In an update of its World Economic Outlook, the IMF said the global economy is likely to contract 1.4 per cent this year, a touch steeper than the 1.3 per cent decline it projected in April.

However, it now sees world growth strengthening to 2.5 per cent in 2010, compared to an April forecast of 1.9 per cent.

IMF chief economist Olivier Blanchard said forces dampening economic activity were easing in intensity but those pushing it up were still weak despite heavy government spending and central bank lending.

"This leads us to predict that while the world economy is still in recession, the recovery is coming but it is likely to be a weak recovery," Blanchard told a news conference.

He emphasized that confidence in the financial sector would not return until toxic debts were removed from banks' balance sheets and frail institutions recapitalized.

The IMF said conditions had improved more than expected as governments have pumped huge amounts of money into their economies and financial institutions, and warned against withdrawing fiscal and monetary support prematurely.

"Although exiting now would be premature, I think it's fundamental that we devise credible plans that map where we're going in the medium-term and how we're going to get there," said Jose Vinals, director of the IMF's Monetary and Capital Markets Department.

Vinals said addressing high public debt levels should be part of exit strategy plans, warning that sovereign debt markets may be destabilized if the burden on public sector balance sheets begins to be perceived as unsustainable.

A summit of Group of Eight leaders from industrial countries on Wednesday committed to withdrawing stimulus spending only when a recovery looked secure.

"All were of the view that the crisis is a long way from being over. With luck, we have reached the bottom," German Chancellor Angela Merkel told reporters at the G8 in the Italian town of L'Aquila.

BELOW-TREND GROWTH AHEAD

The IMF said while the world's advanced economies are expected to recover modestly next year, growth will remain below potential until later in 2010, suggesting unemployment will rise further.

It said the US economy will contract 2.6 per cent this year, slightly less than it thought in April, with growth resuming in 2010, albeit at a mere 0.8 per cent.