The International Monetary Fund (IMF) has projected global economic growth at 3.3 per cent in 2013 and up to 4 per cent in 2014 with uneven recovery in advanced economies, mainly due to private demand in United States improving faster than in the euro area.
Developing, emerging economies will continue to lead global growth, although both emerging market and developing economies need to tighten policies and rebuild buffers, IMF said in its latest World Economic Outlook.
India, with its favourable interest rate growth differential has an advantage in addressing deficit concerns this year, at a time when many countries are facing challenges on the fiscal consolidation front, IMF said.
IMF pointed to the need for monetary tightening, supported with prudential measures to rein in budding excesses in financial sectors. As old dangers remain and new risks emerge, policymakers cannot afford to relax their efforts, IMF said.
Global economic conditions have improved with success in defusing two of the biggest short-term risks to global activity - the threat of a euro area breakup and a sharp fiscal contraction in the United States.
The report forecasts real global GDP growth of 3.3 per cent on an annual average basis in 2013, about the same as the 3.2 per cent growth seen in 2012, and rise to 4 per cent in 2014.
The WEO says all advanced economies have not benefited to the same extent from the improved financial market conditions and confidence. Fiscal brakes in some countries were another important factor that could lead to uneven growth.
''We have moved from a two-speed recovery to a three-speed recovery,'' said Olivier Blanchard, the IMF's chief economist and director of the IMF's research department, which prepares the WEO.
''Emerging market and developing economies are still going strong, but in advanced economies, there appears to be a growing bifurcation between the United States on the one hand and the euro area on the other.''
Private demand in the United States has been showing strength as credit and housing markets heal. But larger-than-expected fiscal adjustment is projected to keep real GDP growth to about 2 per cent in 2013.
In the euro area, real GDP is projected to contract by about 0.25 per cent this year before growing again in 2014. Credit channels are broken: better financial conditions are not yet passing through to companies and households because banks are still hobbled by poor profitability and low capital.
Other brakes on growth in the euro area include continued fiscal adjustment, competitiveness problems, and balance sheet weaknesses.
In Japan, new fiscal and monetary stimulus is expected to drive a rebound in activity, with real GDP growth reaching 1.5 per cent in 2013.
Over 2013–14, these divergences between advanced economies are projected to narrow. Assuming that policymakers deliver on their commitments, the latest WEO report anticipates continued easing of the brakes on real activity and a strengthening of real GDP growth in the advanced economies from the second half of 2013.
Growth in emerging market and developing economies is expected to remain robust, strengthening from about 5 per cent in 2012 to 5.25 per cent in 2013 and 5.75 per cent in 2014.
Activity in most of these economies has already picked up after a slowdown in 2012, thanks to resilient consumer demand, supportive macroeconomic policies, and a revival of exports. In emerging Europe, the recovery should gain speed as demand from advanced economies in Europe picks up.
However, some economies in the Middle East and North Africa continue to struggle with difficult internal transitions.