IMF raises global growth forecast to 3.5%

The International Monetary Fund on Tuesday slightly hiked its global growth forecasts for this year and 2013, but warned that Europe's debt crisis and high oil prices could derail recovery.

The IMF estimated global growth at an annual rate of 3.5 percent this year, accelerating to 4.1 percent in 2013.

The forecasts reflected an upgrade from the January forecast of 3.3 percent and 4.0 percent, respectively.

"The outlook for the global economy is slowly improving again but is still very fragile," the IMF said in a twice-yearly report.

China continued to be the global driver. The world's second-largest economy was forecast to grow at 8.2 percent, picking up to a robust 8.8 percent in 2013.

Despite the blow to its export industries due to "spillovers from Europe", China's economy would post strong growth thanks to "robust" domestic consumption and investment.

The improved forecast arose in part from better global financial conditions and easing fears about the eurozone debt crisis.

Reconstruction in Japan and Thailand, following natural disasters, also helped to foster growth in Asia.

"Policy has played an important role in recent improvements, but various fundamental problems remain unresolved," said the IMF, considered the global lender of last resort for troubled member countries.

The fund cited the European Central Bank's pumping cash into the eurozone banking system, the expansion of a eurozone firewall to contain the debt crisis and structural reforms aimed at restoring financial health.

In the United States, an extension of payroll tax relief and unemployment benefits averted excessive fiscal tightening that would have damaged the US economy.

Growth in the US, the largest economy, was now seen at 2.1 percent this year and 2.4 percent the following year, up from the prior estimates of 1.8 percent and 2.2 percent, respectively.

"The main concern is that the global economy will continue to be susceptible to major downside risks... and that the recovery will remain anemic in the major advanced economies," the IMF said in its World Economic Outlook report.

"These challenges call for more policy action, especially in advanced economies," and include "resolving the euro area crisis without delay."

"The first priority for US authorities is to agree on and commit to a credible fiscal policy agenda that places debt on a sustainable track over the medium term," the IMF said in a warning to bickering policymakers.

The report comes ahead of the IMF's spring meetings with its sister institution, the World Bank, that open this week in Washington.

The IMF raised its growth estimate for the advanced economies to 1.4 percent for 2012, including a contraction of 0.3 percent in the 17-nation eurozone.

Growth would pick up to 2.0 percent in 2013, when the single-currency bloc was expected to post a 0.9 percent recovery rate.

"The WEO projections assume that policymakers will prevent a Greek-style downward spiral from taking hold of another economy on the euro area periphery," the IMF said.

The outlook sees financial stress remaining volatile and falling "only gradually."

Eurozone government and banks face daunting refinancing needs of about 23 percent of gross domestic product in this year alone. Banks trying to reduce debt will trim an estimated $2.6 trillion from balance sheets over the next two years.

"Although these pressures are likely to affect mainly economies in the euro area periphery and in emerging Europe, they will be a drag on growth in core economies that could worsen if funding conditions deteriorate."

However, "if disruptions in the euro area worsen, access to funding is very likely to tighten everywhere," the IMF warned.

Rising oil prices could also wreak havoc, particularly if geopolitical tensions over Iran's disputed nuclear program cuts global supply.

A halt of Iran's exports to the OECD advanced economies, if not offset by other supplies, could push prices up about 20 to 30 percent, the IMF projected.

An oil price shock could reverberate through the global economy, causing a 1930s-magnitude slump, the IMF said.