THE International Monetary Fund (IMF) raised its global growth forecast for the first time in nearly two years, saying developed economies will pick up the mantle of growth from emerging markets.
But the IMF warned richer nations were still growing below full capacity, and added the spectre of deflation to its long list of risks that could derail the nascent recovery.
In an update to its World Economic Outlook report, the Fund predicted the global economy would grow 3.7pc this year, higher than its October projection. It said it sees growth of 3.9pc in 2015.
Olivier Blanchard, the IMF's chief economist, said less government austerity and uncertainty and a healthier financial system were all allowing growth to speed ahead.
"The basic reason behind the stronger recovery is that the brakes to the recovery are progressively being loosened," Mr Blanchard said.
The IMF forecasts higher growth in advanced economies this year but kept its outlook unchanged for the developing world, where higher exports to rich nations were expected to be offset by weak demand at home.
The US is likely to be one of the bright spots, after a budget deal in Congress reduced some of the government spending cuts that had weighed on domestic demand.
The IMF also saw a rosier outlook for Britain, amid cheap credit, a boost in consumption and greater confidence. It raised its growth forecast to 2.4 pc in 2014 from 1.9 pc in October - it was the largest increase among major economies.
Japan's prospects also surprised to the upside, as the IMF predicted further fiscal stimulus should help offset some of the impact from a higher consumption tax planned for this spring. However, the Fund said Japan must focus on consumption and investment to keep growth sustainable, rather than relying on government spending and exports.
The IMF urged central banks to avoid raising interest rates too soon, and called on the European Central Bank in particular to help sluggish demand by boosting credit growth.
Bank lending has decreased in many crisis-ridden southern European countries. But banks had previously used the bulk of cheap loans from the ECB to buy government bonds instead of loaning to the real economy, showing the limits of monetary policy.
The IMF warned that some developing countries could be hit hard by capital outflows this year as the US Federal Reserve begins to scale back the pace of its asset purchases. The IMF expects the Fed to wait until 2015 before it raises its policy rate. (© Reuters)