World Economy Isn't Cured, But It's Looking Much Better

The International Monetary Fund is projecting that the world economy will emerge from its coma this year.

In its World Economic Outlook, released Wednesday, the IMF forecasts global growth of 4.2% in 2010 after 2009's 0.6% decline, the worst overall economic performance since World War II. China's growth is forecast at 10%, while India is projected to gain 8.8%. The U.S. economy is expected to grow at 3.1%, indicating that near-10% unemployment levels will continue to take their toll. Nonetheless, IMF sees reasons for hope.

"We find ourselves at an important new stage of the crisis," IMF Research Department Director Olivier Blanchard said in a press release. "A global depression has been averted. The world economy is recovering, and recovering better than we had previously thought likely."

The IMF's figures, which are up from earlier projections, are in line with other forecasts, and underscore investors' growing optimism. The tech-heavy Nasdaq Composite Index is up more than 52% over the past year, buoyed by better than expected results from stalwarts such as Apple (AAPL). Both the Dow Jones Industrial Average and the S&P 500 are each up about 40%. A survey released Tuesday by American Express (AXP) found that 62% of homeowners plan to tackle remodeling and renovation projects to improve their homes' appearance and value as they await a rebound in the real estate market.

"There is a a big crowd of market participants who believe we have come too far, too fast," said Art Hogan, chief market strategist at Jefferies & Co., in an interview. "I don't think the magnitude of the correction will be what the 'too far, too fast' crowd is looking for."

Meanwhile, the IMF continues to fret about factors pointing to the fragility of the economic recovery, such as the "rapid increase" in public debt and high unemployment. Fiscal stimulus plans for this year should be "fully implemented" and countries need to "ensure that too-important-to-fail institutions ... do not use the funding advantages their systemic importance gives them to consolidate their positions even further," the IMF said.

IMF economists prepared the forecast ahead of the meeting of the G-20 economic council. Bloomberg News reported that the IMF is recommending that G-20 countries tax financial institutions' non-deposit liabilities and the sums of profit and compensation to help pay for future bailouts of the financial services industry. There is growing acceptance that such a levy is needed, the news service said.

Though the world economy is no longer in critical condition, it is far from healthy. As the IMF noted: "... despite improvements, the outlook remains unusually uncertain." Those are hardly words of irrational exuberance.