IMF upgrades global forecasts

UK figures revised upwards but interest rates may have further to go

The high oil price could inflict serious damage on the world economy, the International Monetary Fund warned yesterday as it forecast the strongest growth for more than a decade.

The high oil price could inflict serious damage on the world economy, the International Monetary Fund warned yesterday as it forecast the strongest growth for more than a decade.

The IMF issued a rosy outlook, upgrading its forecasts for all the major economies including the UK. But it warned that the Bank of England would have to hike interest rates unless there was a slowdown in domestic demand, which it said had been "bolstered" by the Government's £43bn public spending package.

In its flagship World Econo-mic Outlook, the organisation said world output would grow 4.7 per cent this year, 0.5 per cent higher than its May forecast and the strongest performance since 1988.

It said next year would see a slight slowdown to 4.2 per cent, compared with a May forecast of 3.9 per cent. US economic growth is expected to hit 5.2 per cent in 2000 before slowing down to 3.2 per cent in 2001.

This would mean the European single currency zone is forecast to overtake the US with growth of 3.4 per cent in 2001.

The IMF said it had raised its forecasts for UK growth this year and next because of stronger domestic demand "bolstered by the planned expansion in government consumption".

But it did not repeat the controversial criticism in its May outlook, when it condemned the March Budget as "regrettably pro-cyclical" - boosting the economy at a time when it needed to slow down.

The UK economy is expected to grow 3.1 per cent this year, a 0.1 per cent revision, and by 2.8 per cent in 2001, a revision of 0.8 per cent.

It noted the Bank had already raised rates by 1 per cent, adding: "Further tightening may prove necessary if domestic demand continues to strengthen or if further depreciation of sterling appears likely to lead to inflationary pressures."

The Treasury denied interest rates would have to rise because of the Budget plans. "You would have to make various leaps between the lines to reach that conclusion," a spokesman said.

In its report the IMF said: "The outlook for the global economy has continued to strengthen, with global growth projected to increase in all major regions of the world.

"Nevertheless economic and financial imbalances remain large, posing a continued risk to the global expansion, and higher oil prices have become an increasing concern."

Michael Mussa, the IMF's chief economist, said 0.5 per cent would be wiped off global economic growth unless the oil price fell sharply. "If oil prices were to stay at $35 a barrel throughout 2001 or if they were to escalate to $40 a barrel or over, then the impact on inflation and world growth would be more significant," Mr Mussa said.

The IMF's outlook is based on average oil prices at about $26.50 a barrel this year and $23 in 2001, compared with a current price for Brent of around $34.

The IMF said the other key threat was a Wall Street crash, triggered by a sudden unwinding of the economic and financial imbalances between the US, Europe and Japan.

These included a "significantly misalignment" between the euro and both the US dollar and the Japanese yen, which are at record highs against the euro.

The IMF warned, as it has done in previous years, of risks from the US's record current account deficit, the high valuation of US shares and the strength of the dollar. "The possibility that these imbalances may unwind in a disorderly fashion remains a risk to global expansion," the IMF said.