April 29th, 2010

The outlook for the world economy: Curb your enthusiasm

THERE is a whiff of exuberance around the world economy these days. Financial markets are buoyant, business confidence is rising and global growth seems increasingly robust. In its latest forecasts, released on April 21st, the IMF predicts that global output will grow by 4.2% this year on a purchasing-power basis, a full percentage point more than it foresaw six months ago. Other seers are even more optimistic, predicting growth of more than 4.5%—or close to the average pace of the boom years before the recession. The level of global output is now back to where it was before the downturn. And given the scale of the financial crisis, the recovery is surprisingly brisk. With global business investment accelerating and consumer spending strong, there is growing optimism that the recovery is becoming self-sustaining.

Some of this optimism is justified. Just as financial stress worsened the recession, so healthier financial markets are now reinforcing the recovery. Higher asset prices have propped up consumer spending and narrower corporate bond spreads have eased firms’ borrowing costs. Economic recovery, in turn, has helped ease financial pain. The IMF has reduced its estimate of banks’ total losses from the crisis by $500 billion, to $2.3 trillion, two-thirds of which has already been written off.