IMF Raises 2010 Forecast

In its World Economic Outlook published today, the International Monetary Fund (IMF) said that the global economy is now beginning to pull out of recession, but warned that "stabilization is uneven," and the "recovery is expected to be sluggish."

The Fund said that the risks to the financial system had moderated since its last forecast in April, mainly due to unprecedented policy actions undertaken by the central banks and governments all over the world, but banks continue to be hampered by bad loans on their balance sheets. The Fund urged the governments not to become complacent about the recent recovery but continue to stimulate their economies through 2010 with greater spending or tax cuts.

IMF expects the world economy to shrink by 1.4% in 2009, slightly worse than its earlier estimate of 1.3%. However, it raised the growth estimate for 2010 to 2.5% from 1.9% earlier.

Improved prospects for the U.S. and Japan led to a better outlook for developed economies, which are projected to grow 0.6% in 2010, better than the earlier estimate for 0% growth. The group is still forecasted to contract 3.8% this year, with activity not expected to pick up until the second half of 2010.

The IMF expects the U.S. economy to shrink by 2.6% this year (a slight improvement from its earlier estimate of a 2.8%) and then grow at 0.8% in 2010.

Japan's economy is expected to contract at 6% this year, instead of a previous forecast of a 6.2% decline, with the 2010 growth estimate raised to 1.7% from 0.5%.

The Euro Area is expected to continue to lag behind other developed economies, and is forecast to contract 4.8% this year and 0.3% in 2010, versus earlier projections for declines of 4.2% in 2009 and 0.4% next year.

Emerging economies overall are expected to remain in positive territory (thanks to China and India), growing 1.5% in 2009 and 4.7% next year. Earlier, the group was forecast to grow 1.6% in 2009 and 4% in 2010.

IMF raised the growth forecast for both China and India, with China expected to grow 7.5% and India expected to grow at a 5.4% rate this year. Further, these two emerging giants are expected to grow at 8.5% and 6.5% respectively in 2010.

Prospects for higher growth will result in higher inflow of capital to China and India. Expect the ETFs like iPath MSCI India ETN (INP) and iShares FTSE/Xinhua China 25 (FXI) to benefit.