Global economy on the mend, IMF says

WASHINGTON — The world economic recovery is set to continue over the next two years and will not be derailed by the earthquake in Japan or the surge in commodity prices, according to the results of the latest global checkup released Monday by the International Monetary Fund.

The world economy is set to grow 4.4% in 2011, down slightly from 5% in 2010. Growth will accelerate slightly to 4.5% in 2012.

In the U.S., growth will stay at 2.8% this year before accelerating to 2.9% next year.

Fears that higher commodity prices will lead to 1970s-style stagflation are overblown, the IMF said.

“Inflation may well be higher for some time but … we do not expect a major adverse effect on growth,” the IMF said.

The macroeconomic effect from the earthquake in Japan is also expected to be limited.

Overall, the downside risks to economic growth have risen, the agency said in its biannual World Economic Outlook. Additional disruptions to oil supplies would be a concern.

The “two-speed” global recovery remains firmly in place, with advanced economies lagging behind emerging and developing market economies. Advanced countries are likely to grow at about a 2.4% rate over the next year while the emerging economies expand at a much higher 6.5% rate.

Over the next two years, the Group of 7 leading nations must cut deficits, the report said. In order to still grow, they must sell products overseas.

Symmetrically, the emerging market economies must rely less on demand in the G-7 countries and more on domestic demand, the IMF said.

The U.S. is hampered by its anemic housing sector. Unemployment is high and is expected to remain so “for many years to come,” the IMF said.

The European Union must reform in ways that increase its low rate of growth in potential output.

Robb writes for MarketWatch.com/McClatchy.