Chinese boom is threatening the global recovery, says IMF report

Oil and food prices to remain high and UK growth downgraded to 2 per cent in 2011

Even as fresh evidence of a sharp slowdown in the economy emerged yesterday, the International Monetary Fund maintained its forecasts for UK growth – but warned of the "serious blow" to the world economy that could emerge if overheating in China and other fast-growing economies is not dampened.

The IMF is forecasting oil prices up from an average of $79 a barrel to $90 a barrel this year. Food prices will remain high, said the fund, until after the 2011 crop season because "weather-related crop damage was greater than expected in late 2010". It added: "Near-term risks are now to the upside for most commodity classes."

Global growth would be 4.4 per cent in 2011 rather than 4.2 per cent, and 4.5 per cent in 2012, the IMF added. However, the prospects for the fast-growing East and the stagnant West are as stark as ever. Emerging countries should see growth of 6.5 per cent this year and a similar expansion in 2012, while US growth is projected to see 3 per cent expansion, up from the previous estimate of 2.3 per cent.

According to the IMF, the UK economy will grow by 2 per cent in 2011 and 2.3 per cent in 2012, a more downbeat assessment than that of the Office for Budget Responsibility, though ministers will be pleased that the IMF implicitly backs their fiscal plan. The UK contracted by 0.5 per cent in the last quarter of 2010.

The IMF's report said: "In advanced economies, activity has moderated less than expected, but growth remains subdued, unemployment is still high, and renewed stresses in the euro area periphery are contributing to downside risks."

Risks to global recovery remained, the report said, adding: "Downside risks arise from the possibility of tensions in the euro area periphery spreading to the core of Europe; the lack of progress in formulating medium-term fiscal consolidation plans in major advanced economies; the continued weakness of the US real estate market; high commodity prices; and overheating and the potential for boom-bust cycles in emerging markets."

The fund also suggested that equity markets in Hong Kong and India were overvalued.

Global growth in 2010 was also revised upwards to 5 per cent, from 4.8 per cent in October, because of the stimulus measures unveiled in the US and Japan, and to 4.4 per cent in 2011. Spain, Italy, Canada and Japan all suffered downward revisions.

The global recovery will advance but "remain uneven", the report said, and inflation more broadly remains a concern. "In emerging economies, key risks relate to overheating, a rapid rise of inflation pressures and the possibility of a hard landing," the IMF said. "With emerging markets now accounting for almost 40 per cent of global consumption and more than two-thirds of global growth, a slowdown in these economies would deal a serious blow to the global recovery."

And while the immediate risk of fresh sovereign debt crisis in the eurozone seems to have subsided, Jose Vinals, the IMF's director of monetary and capital markets, warned: "Banks face significant funding needs now and over the next two years. In many advanced economies, we need to deal with the legacy of the crisis by resolving financial fragilities once and for all."

The IMF endorsed plans to expand the funding of the European Financial Stability facility, which has €250bn of IMF backing. Mr Vinals added: "European sovereign peripheral spreads and bank funding costs are likely to remain elevated during the first half of this year, and financial turbulence could re-intensify.

"The two-track global recovery continues to pose policy challenges. The evident links between weak balance sheets of government and banking sectors have led to renewed pressures in funding markets in the euro area and widening strains."