The International Monetary Fund on Thursday raised its growth forecast for the world economy, but said expansion could be tempered by inflationary pressures, high oil prices and a likely slowdown in the US caused by the cooling housing market. The global economy is likely to grow by 5.1 percent this year and 4.9 percent in 2007 - both a quarter percentage point higher than the fund had forecast in April. “This is really the fourth year of very strong global growth which has been maintained in the face of headwinds such as strong commodity prices,” said Raghuram Rajan, the IMF's chief economist. “The good news in addition to this is that growth is becoming more balanced even if the US economy is beginning to slow, the euro area has gained momentum, Japan's expansion continues and emerging markets and developing countries are delivering very impressive growth,” he said. But the IMF's forecast “is surrounded by more uncertainty than usual, with risks tilted to the downside,” Rajan said. In particular, the IMF cited the possibility that inflationary pressures could intensify and prompt major central banks to raise interest rates further. It also said oil prices could climb higher and that the US housing market could cool more rapidly than expected and trigger an abrupt slowdown in the US. Growth in the United States is expected to slow from 3.4 percent in 2006 to 2.9 percent next year, said the report, released in Singapore, where the IMF and World Bank will be holding their annual meetings Sept. 19-20. Previously, the fund had expected US growth next year to reach 3.3 percent. “The concern remains that a sharp adjustment in the housing sector would generate strong headwinds for the US economy,” the report said. The Washington-based lending institution suggested that further US interest rate hikes might be necessary. The Federal Reserve “faces a difficult situation of rising inflation in a slowing economy, but given the importance of keeping inflation expectations in check, some further policy tightening may still be needed,” it said. In August, the Fed decided to keep its key short-term lending rate at 5.25 percent after 17 straight hikes dating back to June 2004. Japan, the world's second-largest economy, will likely grow 2.7 percent this year on the back of solid domestic demand, but should ease next year to 2.1 percent, it said. The fund also Japan should raise interest rates gradually to avoid a “costly” reemergence of deflation, or falling prices. In the euro area, stronger corporate balance sheets have helped bring about increased investment, rising employment and a more balanced expansion to the 12 nations that use the common currency, the report said. Growth would rise to 2.4 percent in 2006 before moderating to 2 percent in 2007 largely due to scheduled tax increases in Germany. China's sizzling economy will probably steam ahead with 10 percent growth this year and next, propelled by surging exports, helping drive growth in other Asian economies from South Korea to Indonesia, the report said. But the region could be hurt if China's investment boom sours, it warned. The IMF also urged Beijing to raise the value of its currency, the yuan, saying that would help to cut China's huge global trade gap - on pace to surpass last year's $102 billion - and bolster household's purchasing power. Growth in India, emerging Asia's other major engine, would moderate to a still robust 8.3 percent this year and 7.3 percent next year. Latin American economies would continue to lag behind other emerging economies, although growth prospects have increased in the region, with expansion expected at 4.75 percent this year and 4.25 percent in 2007. Inflation in advanced economies was likely to increase modestly to 2.6 percent in 2006 but start to decline next year as the upward impetus from oil price increases eases. Emerging markets would probably also be able to contain inflation pressures, it said. The IMF also warned about the potential for “disorderly unwinding” of large global imbalances in trade and investment. It predicted that the US current account deficit would rise further to 6.9 percent of its gross domestic product in 2007 - with large surpluses continuing in Japan, parts of emerging Asia, and oil-exporting countries in the Middle East, the report said. Other risks to the outlook include further increases in oil prices, the fund said. “Supply concerns have played a growing role in pushing up oil prices, and a major disruption in a large producer or a further escalation of security concerns in the Middle East could well lead to another upward oil price spike,” the IMF said. Oil prices have dropped this month, falling into the $65 a barrel range after spiking to a record $78.40 a barrel in July. To address the risk, the report recommends more investment in production and refining as well as incentives for consumers to save energy. The IMF was established in 1945 to help promote the health of the world economy. It works to foster economic and financial stability, prevent crises and aid countries in trouble.
