IMF says world recession easing

By Lesley Wroughton and Emily Kaiser

WASHINGTON (Reuters) - The global economy is slowly starting to pull out of its deepest recession since World War Two but a recovery will be sluggish and policies need to remain supportive, the International Monetary Fund said on Wednesday.

In an update of its World Economic Outlook, the IMF said the global economy is likely to contract 1.4 percent this year, a touch steeper than the 1.3 percent decline it projected in April.

However, it now sees world growth strengthening to 2.5 percent in 2010, compared to an April forecast of 1.9 percent.

IMF chief economist Olivier Blanchard said forces dampening economic activity were easing in intensity but those pushing it up were still weak despite heavy government spending and central bank lending.

"This leads us to predict that while the world economy is still in recession, the recovery is coming but it is likely to be a weak recovery," Blanchard told a news conference.

He emphasized that confidence in the financial sector would not return until toxic debts were removed from banks' balance sheets and frail institutions recapitalized.

The IMF said conditions had improved more than expected as governments have pumped huge amounts of money into their economies and financial institutions, and warned against withdrawing fiscal and monetary support prematurely.

"Although exiting now would be premature, I think it's fundamental that we devise credible plans that map where we're going in the medium-term and how we're going to get there," said Jose Vinals, director of the IMF's Monetary and Capital Markets Department.