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IMF says global recovery at risk

SAO PAULO (AFP) -- A fragile global economic recovery could falter unless Europe averts sovereign defaults, the United States gets its fiscal house in order and emerging economies prevent overheating, the IMF warned Friday.

“There are very clear risks to the recovery,” the International Monetary Fund‘s research director, Olivier Blanchard, said in Sao Paulo as he presented the Fund’s latest update to its the world economic outlook.

The IMF lowered its 2011 growth forecast a notch, projecting an annual rate of 4.3 percent, a tenth of a point lower than it had forecasted two months ago.

Global inflation was forecast at 4.0 percent.

Blanchard said: “The global recovery continues, but the road to health is a long one and there is no time to relax.”

In the report, the Washington-based lender noted that “activity is slowing down temporarily” and negative growth headwinds were rising.

“Greater-than-anticipated weakness in U.S. activity and renewed financial volatility from concerns about the depth of fiscal challenges in the euro area periphery pose greater downside risks,” it said, updating its April economic, financial and budgetary reports.

Blanchard was especially alarmed at the situation in the eurozone, where Greece was tottering on the precipice of sovereign default, causing jitters in other weaker economies in the region.

The debt trouble risks “derailing the European recovery and perhaps even the world recovery,” he said. “The stakes are very high.”

The IMF report stressed that the European Union has little time left to resolve sovereign debt problems, amid rising concerns among investors and the public.

“Policymakers must act now to make the financial system more robust,” according to the report.

Blanchard also pointed to the risk of “overheating” in some emerging economies in Asia and Latin America.

“Inflation is increasing beyond what can be explained by rising commodity and food prices,” he said.

Blanchard did not identify specific countries at risk, but appeared to be alluding to at least China and Brazil, both of which have seen inflation spike in recent months.

Meanwhile in the United States, growth has “disappointed” since the beginning of the year, the IMF said.

The world‘s biggest economy was projected to expand by 2.5 percent this year, down from the 2.8 percent estimate in April and 3.0 percent in January.

The U.S. slowdown was “in part due to transitory factors -- including higher commodity prices, bad weather, and supply chain disruptions from the Japanese earthquake on U.S. manufacturing,” the IMF explained.

For Japan, “we now predict negative growth for 2011... The disruptions from the earthquake have been stronger than anticipated,” Blanchard said. He expected those problems to go away over the year, however, and positive growth to return in 2012.

The IMF’s 2011 estimate for Japan was slashed, and was now predicted to contract 0.7 percent.

While U.S. and Japanese growth was less than previously expected, the 17-nation eurozone result surprised, mainly thanks to “more upbeat investment in Germany and France.”

For the zone, the IMF raised its 2011 growth estimate to 2.0 percent, from 1.6 percent previously.

Germany, Europe‘s economic powerhouse, was expected to have the strongest surge of any of the Group of Seven rich countries: 3.2 percent. The French economy was projected to grow 2.1 percent.

China remained the global growth champion, its projected rate unchanged at 9.6 percent.

The IMF joined calls for the U.S. Congress to raise its country’s debt limit, warning failure to act would risk a major global market upheaval.

“For the United States, it is critical to immediately address the debt ceiling and launch a deficit reduction plan that includes entitlement reform and revenue-raising tax reform,” it said.

The U.S. government hit its legal borrowing limit of $14.29 trillion on May 16. The Treasury has taken extraordinary technical measures to avert a debt default, but says it will run out of maneuvering room by Aug. 2.

The Fund also admonished the European Union for lagging behind in banking reform and resolution of sovereign debt problems.

“Policymakers must act now to make the financial system more robust,” it said.

The Fund noted intensifying concerns about debt sustainability and the political will to support adjustment efforts that had pushed credit default swap spreads to new highs in Greece.

The IMF also highlighted that worries about the bailed out eurozone periphery economies of Greece, Ireland and Portugal have renewed the focus on the potential for contagion of shocks to banks.