World growth surge gives scope to tackle protectionism, says IMF

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The prospect of a surge in global economic growth this year has given world leaders a final chance to tackle the massive imbalances that threaten to trigger a recession and provoke a return to 1930-style protectionism, the International Monetary Fund said yesterday.

The financial watchdog raised its forecast for global growth this year to 4.9 per cent, the second highest in three decades, from its September outlook of 4.3 per cent.

Two-thirds of the extra growth came from China, India and Russia, with Chinese growth revised up 1.3 percentage points - more than the entire growth of the Italian economy - to 9.5 per cent. But the IMF warned that four years of growth above 4 per cent had allowed politicians to avoid dealing with a whole range of risks to the global economic outlook.

"It would be fair to say to the world 'you've never had it so good'," Raghuram Rajan, its chief economist, said. "But serious policy reform has gone into remission. This period of strong growth is the perfect time to address the medium-term problems of adjusting to a more competitive, integrated world.

"Unfortunately far too little is being done in far too many places ... and from an economic viewpoint there is unlikely to be a favourable environment in which to tackle it."

The IMF said the huge imbalance between record financial deficits in the US, and surpluses in China and other Asian superpowers, was not sustainable. But he said the US's continued ability to fund its shortfall had allowed the optimists to "gain ground" over the pessimists. But he added: "The optimists have to be right every day while the pessimists need to be right only once."

He urged the major economic powers to set up a new multilateral policy framework to oversee a managed adjustment, possibly as part of proposals for reform of the IMF.

The comments, which hint at a repeat of the 1985 Plaza Accord that helped devalue the dollar, came as President Hu Jintao of China began a week-long visit to the US.

Mr Rajan urged the Chinese to take further steps to liberalise their financial system before a further revaluation of its currency, the yuan, but it should be accompanied by a decline in the dollar. "It is in China's interest to allow the currency to appreciate," he said. "It is a win-win situation. It would help if depreciation in the dollar were to take place."

But he said hopes of a benign outcome had been severely dented by the "real danger" of rising protectionism in the countries across the world.

In comments that will be seen as a warning of a return to the nationalism that led up to the Second World War, Mr Rajan said: "Some governments see their role as pandering to vociferous interest groups by obstructing change. People tend to dismiss these as minor frictions - sand in the gears of the globalisation juggernaut. History, however, suggests the distance from economic patriotism to unbridled nationalism is a short one."

Fund's mixed message for Chancellor over UK economy

The IMF raised its forecasts yesterday for UK economic growth this year but warned that Gordon Brown was perilously close to breaching his rule governing the size of government debt.

In a mixed message for the Chancellor, it said the British economy would grow 2.5 per cent this year, rather than the 2.2 per cent it predicted in September.

This puts it at the top of the 2 to 2.5 per cent forecast Mr Brown issued in last month's Budget and marks an unexpected endorsement by the IMF.

However, the fund, which has repeatedly criticised the Chancellor's tax and spending policy, urged Mr Brown to use his 2007 spending review to limit expenditure to growth to prevent breaching his rule that debt must not rise above 40 per cent of GDP.

It also sent out a warning on house prices, saying homes were "richly valued" and that a slump in prices was still the largest risk to growth.

In its key World Economic Outlook, it said the current slowdown in spending growth combined with the rise in North Sea taxes announced in last year's pre-Budget report would keep debt "at about 40 per cent" of GDP. "But this depends on specifying concrete measures to contain spending after 2008," it said. "Greater consolidation efforts would be required to meet the authorities' more ambitious fiscal projections over the medium term."

The WEO pencils in net debt hitting 41.7 per cent by 2011, although few expect Mr Brown still to be Chancellor by then. However, the IMF dropped its long-standing warning that the Chancellor was on track to break his "golden rule" that he must balance the budget over an economic cycle.

The Treasury said the Budget showed the Government's spending plans were fully funded. "We remain firmly on track to meet the golden rule and the sustainable investment rule," a spokesman said.

The IMF said an outbreak of bird flu could wipe out 2 per cent of GDP growth in the affected country. In the UK this would be equivalent to the impact of the recession of the early 1980s. "In general the level of preparedness and awareness [across the world] is low," it said.