IMF sees beginning of sluggish global economic recovery

Better. But still bad.

That's the International Monetary Fund's latest verdict on the global economy. Thanks to aggressive actions by the U.S. and other governments, the danger of a collapse into depression has been avoided, the IMF said Wednesday. Growth this year will be slightly less than the fund predicted in its April forecast, but better than expected in 2010.

"The worst is behind us and the recovery is coming. The recovery is fragile, however," said Olivier Blanchard, the fund's chief economist.

The fund says global output will shrink by 1.4% this year, before growing at an annual rate of 2.5% in 2010. Officials cautioned against complacency, saying governments need to continue using all available tools to keep the economy afloat.

A premature reduction in public spending or interest rate increases would short-circuit a recovery that's expected to be noticeably weaker than most post-recession bounces.

"We are still at a critical stage in emerging from the crisis. We need to guard against slipping backward," said Jose Vinals, director of the IMF's monetary and capital markets department.

IMF economists hailed improved prospects for India and China, now expected to grow at an annual rate of 8.5% next year. But they said the U.S. will barely grow in 2010, expanding at an annual rate of just 0.8%. That is well below the Obama administration's estimate of about 3% growth.

Signs of financial stabilization include healing credit markets and greater investor willingness to buy risky assets, the fund said. But despite massive taxpayer-funded bailouts, major banks in the U.S. and Europe remain vulnerable to soaring loan defaults caused by weak economies.

"The main policy priority remains restoring financial sector health," the IMF concluded.

Even once the immediate crisis is past, long-run worries abound. Unwinding the unprecedented monetary and fiscal rescue efforts will be tricky, the fund said. And officials should begin planning now on exit strategies to reassure skittish financial markets.

It's also not yet clear what will replace tapped-out U.S. consumers as the chief engine of economic growth. Government spending is serving as a temporary support for the global economies, but sustainable growth requires new private demand, the IMF said.