- Associated Press - Wednesday, October 6, 2010

WASHINGTON (AP) — China and other emerging powers are offsetting weakness in the United States and Europe and likely will lift the global economy this year and next.

That’s the latest outlook of the International Monetary Fund, which predicts the world economy will expand 4.8 percent this year and 4.2 percent next year. That growth would far surpass last year’s 0.6 percent decline, the worst since World War II. The IMF’s forecast for worldwide growth this year is 0.2 percentage point more than its previous estimate in July.

The international lending agency predicts the U.S. economy will grow 2.6 percent this year, below its previous estimate of 3.3 percent, and 2.3 percent next year.

The IMF’s forecast, released Wednesday, points to lingering weakness in the United States and Europe after the worst recession since the Great Depression.

The agency said the global economy will require a balancing act. Countries with huge trade and budget deficits such as the United States will need to boost exports. Countries with big trade surpluses such as China must reduce their dependency on exports and boost domestic demand.

A major factor dampening U.S. exports is that China and other emerging nations have been manipulating their currencies to gain trade advantages.

Treasury Secretary Timothy F. Geithner on Wednesday stepped up pressure on China to make more progress in moving toward flexible exchange rates. Mr. Geithner said it is particularly important to see appreciation in countries where the currency is significantly undervalued.

Mr. Geithner did not mentioned China, but his speech at the Brookings Institution clearly was directed at the world’s second-largest economy.

China’s economy is still only one-third the size of the U.S. economy, but the gap is likely to narrow in the coming years.

The IMF prediction of 2.6 percent growth for the United States this year is historically weak coming after a recession. It marks a sharp reversal from the 2.6 percent decline in U.S. activity last year. That was the steepest drop since 1946. The U.S. forecast is down from a 3.3 percent projection the IMF made in July.

But the U.S. economy slowed sharply in late spring and summer this year as the European debt crisis shook the confidence of investors and businesses. The IMF’s forecast of 2.3 percent U.S. growth for 2011 is down from its 3 percent estimate in July.

Growth prospects are even weaker in Europe. The 16 nations that use the euro will see their economies average 1.7 percent growth this year and 1.5 percent next year, the IMF said. Still, both those forecasts are upgrades from July, following a debt crisis that began in Greece and threatened to widen throughout Europe.

Growth in Japan is projected to be 2.8 percent in 2010 and 1.5 percent in 2011. Its 2011 estimate was trimmed because Japan still is struggling to emerge from nearly two decades of anemic growth.

Combined, advanced economies such as the United States and Europe are forecast to grow 2.7 percent this year and 2.2 percent next year.

By contrast, emerging and developing economies such as those in China, Russia, Eastern Europe and Latin America are expected to expand 7.1 percent this year and 6.4 percent in 2011 — more than double the growth rates of the advanced economies.

Leading the growth surge is China, the world’s second-largest economy. Growth in China is forecast to be 10.5 percent this year and 9.6 percent next year.

Brazil’s economy is expected to grow 7.5 percent this year before slowing to 4.1 percent next year.

The IMF said the recovery from the recession remains vulnerable to threats, including soaring budget deficits in many nations. It says credible plans to cut deficits are urgently needed.

The IMF’s latest World Economic Outlook indicates that more than 210 million people across the globe are unemployed. That’s an increase of more than 30 million since 2007 before the recession began.

For the global economy to continue growing, the IMF said, advanced economies such as the United States will need to see stronger spending by consumers and growth in exports.

The administration has intensified its criticism of China over its currency. Washington contends that Beijing must move faster to allow the yuan to rise in value against the dollar. American manufacturers contend that the yuan is undervalued by up to 40 percent, giving Chinese producers a big price edge over U.S. companies.

A senior Treasury Department official told reporters Tuesday that the need to reform currency policies would be a big part of the discussions. The official spoke on condition of anonymity to discuss U.S. positions in advance of the meetings.

The House, before adjourning for the midterm elections, approved legislation to impose economic sanctions on countries such as China that are found to have manipulated currencies to gain trade advantages. The Senate is unlikely to approve the measure this year. But House passage might give the administration more leverage with China on the currency issue.

Lawmakers are under pressure to act at a time of high unemployment in the United States. More than 8 million people lost their jobs during the recession, and the unemployment rate remains stuck near double-digit levels.