Heavyweight investment bank Merrill Lynch yesterday substantially upgraded its forecasts for global growth on the back of signs of recovery in the United States and China but warned that the world will emerge only slowly from recession.

Heavyweight investment bank Merrill Lynch yesterday substantially upgraded its forecasts for global growth on the back of signs of recovery in the United States and China but warned that the world will emerge only slowly from recession.

Banc of America Securities-Merrill Lynch Research raised its forecast for global economic growth for 2010 to 3.7% from 3.2%.

Its economists are predicting the US economy will grow by 2.6% next year, compared with a previous estimate of 1.8%, driven by government spending, companies rebuilding their inventories and a modest pick-up in consumer spending.

China is expected to post growth of 9.6% in 2010, up from a previous forecast of 8.3%, underpinned by government stimulus packages and a recovery in exports. The same trend should benefit other emerging economies, particularly within Asia, Merrill's analysts said.

But the rebound in the economy, which the analysts think will come after a 1% decline in the global economy this year, will be far weaker than after past recessions.

Riccardo Barbieri Hermitte, head of international economics, global currencies and rates research for Banc of America Securities-Merrill Lynch, said: "Considering we are coming from the biggest contraction in the global economy in the post-war period this would still be a relatively slow recovery. If we were to have a traditional v-shape it is conceivable we could see the economy grow by 4% perhaps 5%.

"On balance we are reasonably confident growth should accelerate further in 2011."

Hermitte played down the chances of the economy declining again in the near future, creating a w-shaped recession: "Overall we do not expect to double dip. I think it is premature to talk about double dip when we are still in recession."

But he did warn that a shock to the economy could send it into reverse, noting that an apparent recovery from a slowdown in the early years of this Millennium was knocked by the World Trade Centre attacks of September 2011.

"If we have any unexpected developments and shocks to the system of course the recovery could be reversed. I wouldn't rule out a relapse but I think it is more likely confidence will improve."

He added: "My view is that the downside risks are such that they justify additional stimulus if the economic figures show the nascent recovery is faltering."

Merrill Lynch is still very cautious on the pace of recovery in the euro area, which it thinks will post 1.2% growth next year and for the UK where it sees the economy advancing 1.1%.

Hermitte said: "It is unrealistic to think we will go back to the growth rates we were seeing earlier in this decade."

Merrill believes the UK banking sector will continue to restrict credit supply which will weigh on a recovery.

Merrill is expecting a long period of low interest rates. It predicts Federal Bank rates, currently below 0.25%, will remain into 2011. Most observers believe they will start ticking up early next year. It anticipates eurozone rates to go up in the final months of 2010 and the Bank of England to raise base rates again in mid-2010.

Despite more upbeat growth forecasts Merrill has only nudged up its global consumer price index inflation by ten basis points to 1.5% in 2009.

Merrill is predicting an average oil price of $59 this year and $75 next year.