OREANDA-NEWS. April 25, 2012. The International Monetary Fund (IMF) raised its projections for the global economic growth in 2012 and 2013, but cautioned risks, especially a renewed crisis in Europe, still linger.
 
"With the passing of the crisis, and some good news about the U.S. economy, some optimism has returned," said the IMF in its latest World Economic Outlook (WEO) report.
 
"It should remain tempered," the Washington-based multinational institution cautioned, saying the risk of another crisis is still very much "present" and could well affect both advanced and emerging economies.
 
According to the report, the world economy would grow at a pace of 3.5 in 2012, 0.2 percentage point higher than the previous estimate in January. Advanced economies would grow at 1.4 percent while emerging and developing economies would expand at a much higher 5.7 percent.
 
For the year of 2013, the world economic activities would pick up steam and growth would strengthen to 4.1 percent, the Fund projected.
 
"Our baseline is constructed on the assumption that another European flare-up will be avoided, but that uncertainty will linger on," Olivier Blanchard, IMF chief economist, said Tuesday at a news conference at the Fund.
 
The IMF recognized recent improvement in the U.S. economy, predicting growth of 2.1 percent in 2012 and 2.4 percent in 2013. "Risks to the outlook are more balanced but still tend to the downside given fiscal uncertainty, weakness in the housing market, and potential spillovers from Europe," it noted.
 
The Fund said situation stabilized since early January in Europe with improving financial market sentiment and encouraging signals for activity.
 
Near-term prospects and risks for Europe depend importantly on the course of events in the euro area, the IMF noted. It predicted the economy in the euro area would contract by 0.3 percent in 2012 and improve to positive in the course of 2013.
 
"Much weaker external demand has dimmed the outlook for Asia," the IMF said. However, resilient domestic demand in China, limited financial spillovers, room for policy easing, and the capacity of Asia banks to step in as European banks deleverage suggest that the "soft landing" under way is likely to continue, the IMF noted.
 
The report noted fiscal consolidation and bank deleveraging would be the two main brakes on growth in advanced economies.
 
"Fiscal consolidation is needed and is processing, but is weighing on growth. Bank deleveraging is also needed, but is leading, especially in Europe, to tight credit," Blanchard explained.
 
He pointed out that right strategy should be combining immediate fiscal adjustment with credible long-term commitments.
 
Emerging countries, which may suffer from volatile capital flows, have enough policy room to maintain a solid growth.
 
While regarding geopolitical tension affecting the oil market as surely a risk, the IMF argued the main risk for the global economy remains another acute crisis in Europe.
 
As for the policy implications, the IMF said measures should be taken in Europe to decrease the links between sovereigns and banks, from the creation of euro level deposit insurance to the introduction of limited forms of eurobonds.
 
The IMF mentioned the highest priority is to durably increase growth in advanced economies, especially in Europe. "For the moment, the focus should be on measures that increase demand."
 
"While we expect growth in many emerging and developing economies to continue at a relatively solid pace, growth in industrialized economies is going to remain very weak and vulnerable," Jorg Decressin, deputy director of the IMF's research department told Xinhua.
 
"The growth in advanced economies would only strengthen gradually as they are implementing fiscal adjustment which would continue to weigh on growth,...but we are expecting this will materialize in the course of 2013," he said.