MAJOR PROBLEMS: Oil and food prices are likely to remain high and volatile, according to the IMF. -- PHOTO: AFP

However, the agency coupled the improved forecasts with stark warnings that demand was slowing sharply in major industrial economies and inflation rising everywhere.

In an update of its April projections, the IMF said world economic growth is set to slow to 4.1 per cent this year from 5 per cent last year and ease further next year to 3.9 per cent.

In April, it had predicted that world growth would slow even more steeply to 3.7 per cent this year and 3.8 per cent next year.

Explaining the revisions, its chief economist Simon Johnson said the effects of turmoil stemming from the United States sub-prime lending crisis were still filtering through the global economy, although at a slower rate than previously expected.

He said a US fiscal stimulus package was also cushioning spending by American consumers, at least temporarily.

The IMF now estimates that the US economy will expand 1.3 per cent this year, rather than 0.5 per cent estimated in April. It said next year's growth would be 0.8 per cent instead of 0.6 per cent.

But it stressed that key problems were on the horizon.

'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 IMF said.

Mr Johnson said the IMF still believed there was a chance that the world economy could enter a recession. In April, the IMF warned there was a 25 per cent chance that world growth will drop to 3 per cent or less, a level that would be considered recessionary.

He said financial market conditions were still very fragile and not likely to improve any time soon. The IMF is scheduled to release its quarterly report on financial market stability on July 28.

'In the recent past, the global economy has managed to take large shocks in stride but we think its capacity to absorb them is being increasingly challenged,' Mr Johnson said.

The IMF warned that inflation was mounting everywhere but rising faster in emerging and developing economies.

It revised up slightly growth forecasts for emerging and developing economies to 6.9 per cent this year and 6.7 per cent next year, but still a significant slowing from 8 per cent last year. China's economic expansion is now expected to ease to around 10 per cent from about 12 per cent last year, the fund said.

In emerging economies, higher interest rates and more fiscal restraint are needed, and in some cases, countries should allow their currencies to appreciate to contain inflation, the IMF said.

Oil and food prices are expected to remain high and volatile, with financial conditions temporarily adding to upward price pressures.

REUTERS