IMF: China Leading World Economic Upturn

The global economy is on course for its best four-year performance since the early 1970s after battling through strong headwinds during 2006, the International Monetary IMF said today.

In its half-yearly world economic outlook, the IMF said the rapid expansion of China and India would help the world economy to grow by 5.1% this year and 4.8% in 2007 - a stronger performance than it had been predicting in April.

It warned, however, that there were downside risks to its forecasts - including a crash in the US housing market, the possibility that rising inflation would prompt central banks to raise interest rates and that financial markets would take fright at the lopsided nature of the global economy.

While the US was running a record trade deficit of almost 7% of GDP, as it sucked in imports from the rest of the world, China was running a trade surplus of a similar size. The key to the future, the IMF said, was whether these imbalances unwound in an orderly or disorderly fashion.

China is forecast to grow by 10% this year and next, three times as fast as the US - the best performing of the leading seven industrial nations; the others being Japan, Germany, Britain, France, Italy and Canada.

The IMF said its forecast of strong growth in 2007 depended on "the view that inflationary pressures will be successfully contained with modest further interest rate increases by the major central banks, that the growth of domestic demand will be better balanced across the developed economies, that emerging and developing countries will largely avoid capacity bottlenecks, and that global financial market conditions will be more stable now that excessive valuations in some sectors have been reduced."

The IMF believes there is a one in six chance that growth could fail to reach 3.25% next year, particularly in the event of a further spike in oil prices or a crash in the US housing market. Property was overvalued in a number of other countries, including Britain and Spain.