The global downturn this year and next is set to be less brutal than was previously feared, but dangers to the world economy from faltering growth and mounting inflation still leave it in a “tough spot”, the International Monetary Fund said yesterday.

In an updated assessment, the IMF soothed anxieties over a vicious worldwide economic slump as it upgraded its forecasts for growth potential in the leading industrial countries.

However, it sounded a warning that risks remain high, with key economies still expected to be even weaker in 2009 than this year, and inflationary pressures intensifying. Simon Johnson, its chief economist, said there was still a chance of global recession.

“The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere,” the IMF’s interim update of its twice-yearly World Economic Outlook said.

“Global growth is expected to decelerate significantly in the second half of 2008, before recovering gradually in 2009.”

The report said that financial risks to growth “remain elevated”, but it lifted growth forecasts for the leading economies as a result of them having so far weathered the shocks from financial upheavals and soaring commodity prices better than expected.

The fund now expects global growth of 4.1 per cent this year, against its 3.7 per cent forecast in April. It also now expects growth of 3.9 per cent in 2009, up a fraction from 3.8 per cent.

The stronger global performance was driven by a more potent projected showing by the United States this year, with growth now tipped to be 1.3 per cent, compared with the near-stagnation of 0.5 per cent that the IMF forecast in April.

Its growth forecast for the US in 2009 was also raised, from 0.6 to 0.8 per cent. The US economy is still expected to contract in the second half of this year, as rising energy bills and the credit crunch hit consumer spending.

In the eurozone, growth this year is also now tipped to be more robust than previously predicted, at 1.7 per cent, compared with the IMF’s April view of 1.4 per cent. The fund left its eurozone forecast for 2009 unchanged at 1.2 per cent, however. The fund sounded an alert over a growing global inflation problem, and urged that tackling this should be the top priority for governments and central banks.

“Inflation is mounting in both advanced and emerging economies, despite the global slowdown,” it noted. Emerging markets needed higher interest rates and tougher fiscal policy but there was less of a case for tighter economic policy in developed countries.

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