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IMF: It's not as bad as we thought

The impact of the global credit crunch may have been overestimated, claims the IMF.

The International Monetary Fund (IMF) has raised its global economic forecast after the impact of a credit crunch was not as severe as had been first feared.

The IMF said it now expects the global economy to grow 4.1% in 2008, up from an initial forecast of 3.7% in April. That compares with 5% growth in 2007.

In an update to the World Economic Outlook it published in April, the IMF said: "The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere, notably in emerging and developing countries".

"The top priority for policymakers is to head off rising inflationary pressure, while keeping sight of risks to growth."

The comments from the IMF may go some way to easing concerns that many of the world's largest economies are heading for a prolonged recession, brought on by problems in the US housing market and the subsequent credit crunch.

Based on its new calculations, the IMF expects the UK economy to grow by 1.8% in 2008 and 1.7% in 2009 - up from a previous forecast of growth of 1.6% in both years.

The UK government has forecast growth of 2% this year and 2.5% in 2009.  According to the IMF, the US economy is also expected to perform better than initially forecast.

The IMF added that risks to the world economy from the financial sector remained elevated and said inflation was an increasing concern.

"Inflation is mounting in both advanced and emerging economies, despite the global slowdown," the IMF said in its report.

It also pointed out that central banks and governments had to juggle the twin problems of slowing economic growth and surging inflation, driven by record oil prices and higher food costs.