IMF strikes positive note

The International Monetary Fund yesterday added its voice to optimism about the prospects for the global economy, saying rock-bottom interest rates and the "remarkable resilience" of financial markets had left firms poised to invest.

In an upbeat assessment of the outlook for Wall Street and the City, the IMF said the financial system had been "severely tested" by the dotcom crash, but low borrowing costs had laid the foundations for recovery by helping corporations which were hit hard by the downturn to rebuild their finances.

"The improved balance sheet positions of corporations [have] placed them in a better position to contribute to the global economic recovery by increasing investment spending," the IMF said in its twice-yearly Global Financial Stability Report.

"The reduction of policy interest rates to post-war lows...has facilitated progress in restoring financial soundness."

Policymakers on both sides of the Atlantic have been pinning their hopes on a pick-up in corporate investment to kick-start economic recovery as anaemic income growth puts the brakes on consumer spending.

The report, published in the run-up to the IMF and World Bank annual meetings in Dubai later this month, identified several potential dangers to the market upturn, but with firms less strapped for cash, it said the risk of a crash was lower than six months ago.

"Having strengthened their balance sheets, most corporations and financial institutions are now better prepared to cope with slower growth than they were last fall."

Central banks have repeatedly cut interest rates to boost confidence since the hi-tech boom began to unwind, and the IMF suggested they may have to keep them low for some time, while "unambiguous signs of stronger growth are still lacking".

The report also warned that US mortgage funds, including the scandal-hit Freddie Mac, could be vulnerable as low interest rates and strengthening economic growth raise bond yields.