The global economy is starting to pull out recession but recovery will be sluggish and government 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 expected in April.

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

Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating, although to varying degrees among regions, the IMF said.

The Fund said policies should remain supportive until growth resumes and deflationary risks dissipate. Where there is room, central banks should explore cutting interest rates further and signal that they intend to keep them low until a durable recovery is under way.

It said concerns about rising government debt levels, as a result of higher government spending to shore up economies, highlight the need for stronger medium-term fiscal policy frameworks.

Although fiscal policy should stay supportive through 2010, plans should be made for rebuilding fiscal balances and ensuring sustainable debt paths after growth is firmly reestablished, the IMF said.

(Reporting by Lesley Wroughton; Editing by Andrea Ricci)

International Monetary Fund