(Kitco News) - The International Monetary Fund is still looking for global economic growth to pick up in 2014 but at the same time cautions that there are still “significant downside risks,” particularly the potential for more turmoil in emerging markets and deflation in the euro area.
Global economic growth picked up in the second half of 2013, fueled by improvement in advanced economies, said a report Wednesday from IMF staff prepared for a Group of 20 meeting in Sydney, Australia, this weekend. However, in many emerging markets, domestic demand has been weaker than expected, in part due to tighter financial conditions, the IMF said.
“A new bout of financial volatility has affected emerging-market economies as markets reassess their fundamentals,” the IMF said. “While the pressures were relatively broad-based, emerging economies with relatively high inflation and high current-account deficits saw the largest asset price declines initially.
“Markets are showing signs of stabilizing recently, although they are still fragile, on the back of actions by key emerging economies to shore up confidence and strengthen their policy commitments. This episode, however, underscores vulnerabilities and the challenging environment for many emerging economies.”
The IMF said its outlook remains roughly as projected in January. Global growth is forecast to increase to about 3.75% in 2014 from 3% last year, then improve further to 4% in 2015.
“However, the recovery is still weak and significant downside risks remain,” the IMF said. “Capital outflows, higher interest rates, and sharp currency depreciation in emerging economies remain a key concern and a persistent tightening of financial conditions could undercut investment and growth in some countries given corporate vulnerabilities. A new risk stems from very low inflation in the euro area, where long-term inflation expectations might drift down, raising deflation risks in the event of a serious adverse shock to activity.”
The IMF called for “cooperation” to promote financial stability, in particular urging advanced economies to avoid “premature withdrawal” of accommodative monetary policy. The IMF also urged for “credible” macroeconomic policies in emerging-market economies, including tighter monetary policy to combat inflation where necessary, as well as certain structural changes, including fiscal policy credibility.
By Allen Sykora of Kitco News; email@example.com