Washington : The International Monetary Fund (IMF) raised its forecast for global growth this year led by China and cautioned that a failure of nations to contain soaring public debt might have "severe" consequences for the world economy.

The IMF on Wednesday said the global economy would expand 4.2 per cent in 2010, the fastest pace since 2007, compared with a January forecast of 3.9 per cent.

Emerging nations including China and India were leading the world out of its worst recession since the Second World War, with Europe and Japan trailing the US, the fund said in its World Economic Outlook.

After governments spent trillions of dollars to revive growth, the IMF said the challenge facing policy makers gathering in Washington this week was debt near postwar records. The richest nations faced growing pressure from investors to draft plans to reduce budget deficits, while emerging economies tried to fuel domestic demand and avoid asset bubbles amid a surge of foreign investment.

"The global recovery has evolved better than expected, but in many economies the strength of the rebound has been moderate given the severity of the recession," the IMF said. "Activity remains dependent on highly accommodative macro-economic policies and is subject to downside risks, as fiscal fragilities have come to the fore."

Finance ministers from the Group of Seven industrial nations were to meet later yesterday in the US capital. Today, finance ministers and central bankers from the Group of 20 developed and emerging economies meet to debate how and when to remove fiscal and monetary stimulus as the global expansion strengthens.

G20 members

The G20 accounts for about 85 per cent of global gross domestic product. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the US, the UK and the European Union.

The G20 also is weighing proposals to have banks shoulder the costs of rescuing the financial industry after governments provided an estimated $11 trillion (Dh40 trillion) to institutions including New York's Citigroup and Edinburgh's Royal Bank of Scotland Group. The world economy contracted 0.6 per cent in 2009, less than the 0.8 per cent projected in January, said the IMF from its Washington base. It expected expansion of 4.3 per cent in 2011.

IMF chief economist Olivier Blanchard said on Wednesday the rebound was "firming up, but it is what we call a multi-speed recovery" with "very slowly decreasing unemployment".

As rising deficits bring some countries to the verge of a "debt explosion", realigning budgets would be "easy in some countries, harder in others," he said.

This year, advanced economies including the US, Germany and Japan were expected to grow 2.3 per cent, more than the 2.1 per cent forecast in January, with unemployment forecast to stay close to 9 per cent through 2011. The expansion in advanced nations would reach 2.4 per cent next year, the fund said.

Emerging and developing economies including Brazil and Russia would grow 6.3 per cent this year, a 0.3 percentage point increase on the previous forecast. Next year they would expand 6.5 per cent, the fund said.

"Economies that are off to a strong start are likely to remain in the lead, as growth in others is held back by lasting damages to financial sectors and household balance sheets," the IMF said.

US gross domestic product (GDP) will expand 3.1 per cent this year before slowing to 2.6 per cent in 2011, the IMF said. In January the fund expected growth of 2.7 per cent for 2010 in the world's largest economy.

The euro area was likely to expand 1 per cent this year, unchanged from the January projection, and 1.5 per cent in 2011, according to the report. The IMF forecast UK growth of 1.3 per cent this year and 2.5 per cent in 2011.