The International Monetary Fund says global GDP growth is expected to be a very strong 5% this year, but it cautions that the future looks weaker than expected.

“Over the past year, the global recovery has become increasingly well-established,” the IMF says in its latest forecast, noting that the average 5% growth projected for 2004 is the highest level for nearly three decades.

“ That said, growth momentum has slowed from the second quarter of 2004, notably in the United States, Japan, and China, while oil prices have risen sharply,” it notes. “Looking forward, the global expansion — while still solid — will therefore likely be somewhat weaker than earlier expected; the balance of risks has shifted to the downside with further oil price volatility a particular concern.”

“On the policy side, interest rates will need to rise further as the recovery proceeds, although the pace and timing vary considerably across countries, depending on their relative cyclical positions,” it predicts.

However, the IMF says the key challenge will be “to take advantage of the upturn to make progress in addressing fundamental medium-term problems, including difficult fiscal positions, growth-restraining structural weaknesses, financial and corporate vulnerabilities, and — last but not least — continuing global current account imbalances.

“While progress is being made, it is generally limited; without further action there is a serious risk of shortfalls in many regions, leaving the world significantly more vulnerable to the shocks it will inevitably face in the future.”

In Canada, the IMF says that the economic expansion has “gained momentum, reflecting both the global expansion and low domestic interest rates, and the forecast for growth in 2004 has been revised up”. Real GDP growth accelerated from 3% in the first quarter to 4.25% in the second quarter, it notes. “Personal consumption is being driven by surging employment, rising disposable income, and a buoyant housing market; business investment, by robust profitability; and exports, by global demand, especially from the United States, despite the appreciation of the Canadian dollar,” the IMF says.

The agency says that September rate hike was appropriate given the acceleration in growth, which is helping to close the output gap and gradually push core inflation higher. “Given the generally robust economic outlook, monetary policy will likely need to continue removing stimulus gradually over the coming months,” it says. “While Canada’s fiscal position is the most favorable among G-7 countries, the government’s efforts to sustain surpluses and maintain the federal debt to GDP ratio on a downward track remain appropriate, given impending fiscal pressures from population aging.”