IMF warns of new threats to global recovery

IMF warns of new threats to global recovery

Washington: Soaring oil prices and inflation in the emerging economies that were a welcome source of stability during the financial crisis pose dangerous new risks to the world economy, the International Monetary Fund said on Monday.

The global lender’s latest assessment of global economic prospects marked a departure from recent years when its focus was on the potential peril from a near-financial meltdown and recession in advanced countries.

The fastest growth in recent years has come from emerging markets like China, Brazil and India, which helped offset the deep downturns in the United States and other rich nations touched off by burst housing bubbles.

Now, the IMF warns those very economies risk asset bubbles akin to the ones that sparked the 2007-2009 financial crisis.

“The challenge for many emerging and some developing economies is to ensure that present boom-like conditions do not develop into overheating over the coming year," the IMF said in its World Economic Outlook report.

The IMF highlighted the searing impact that rising food and commodity prices posed to poorer countries.

Soaring costs for basic stapes stoked the social and economic tensions that have roiled the Arab world. Street protests have toppled dictatorships in Egypt and Tunisia, and left leaders in Yemen and Libya fighting to cling to power.

The fund said inflation pressures were likely to build in developing countries as people pushed for higher wages in the face of pricier food and fuel.

Somewhat surprisingly, the IMF said it saw little lasting impact from the triple disaster - earthquake, tsunami and nuclear crisis - that struck Japan last month. It revised down its 2011 forecast for growth in the world’s third-largest economy only slightly and raise its projection for 2012.

Speaking of advanced economies collectively, the IMF said a slow-paced recovery was continuing and that risks of a “double-dip" recession had decreased. But it said unemployment remained stubbornly high and not enough action was being taken to ratchet down budget deficits in the United States and elsewhere.

Recovery Picking Up

The IMF maintained its forecasts for global growth for both 2011 and 2012 at 4.4% and 4.5%, respectively, saying the global recovery was strengthening even though downside risks have risen.

The fastest growth was still coming from emerging economies, it said. China was expected to lead the way with growth of 9.6% this year, followed by India’s economy, which was projected to expand 8.2%.

By contrast, the United States was forecast to grow at a sub-par 2.8% rate this year and 2.9% in 2012.

The IMF expressed concerns that US plans to cut its budget deficit were backsliding and it urged Washington to tackle politically thorny Social Security and tax reforms.

In Europe, the IMF said the recovery was gaining traction despite financial turbulence in Greece, Ireland and Portugal, which have sought IMF and European Union rescue loans to stabilize their financial systems.

The IMF revised up its outlook for the euro zone to 1.6% this year and 1.8% in 2012.

“The outlook is for a continued gradual and uneven expansion in Europe," the IMF said.

The fund said many old policy challenges remained unaddressed even as new ones appear on the horizon.

In advanced economies, strengthening the recovery underway will require keeping monetary policy accommodative as long as wage pressures are subdued, inflation expectations are kept under control, and bank credit is sluggish.

The European Central Bank last week raised interest rates in the first of what is expected to be a series of moves. In contrast, the United Kingdom has held rates steady and the US Federal Reserve is expected to keep its easy policies in place through this year.

In emerging economies, the IMF said, it would be a mistake for policymakers to delay additional policy tightening until rich nations start to raise rates.

“The task facing policymakers is to convince their national constituencies that these policy responses are in their best interest regardless of the actions others are taking," the IMF added.

Emerging economies have accused the United States and other advanced economies for causing the surge in potentially destabilizing capital flows with their easy monetary policies. Some, like Brazil, have introduced capital controls to manage the flow of investment money.