IMF warns of potential risks to global growth

WASHINGTON Tue Jul 29, 2014 12:10pm EDT

International Monetary Fund Managing Director Christine Lagarde speaks during a conference about the future of the Euro zone organized by the Robert Schuman foundation in Paris July 18, 2014.    REUTERS/Philippe Wojazer

International Monetary Fund Managing Director Christine Lagarde speaks during a conference about the future of the Euro zone organized by the Robert Schuman foundation in Paris July 18, 2014.

Credit: Reuters/Philippe Wojazer

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WASHINGTON (Reuters) - Sharply higher interest rates around the world could combine with weaker growth in emerging markets to slice as much as 2 percentage points off global growth in the next five years, the International Monetary Fund said on Tuesday.

In a report assessing how individual national policies could interact to undermine the world economy, the IMF also warned the conflict between Russia and Ukraine could reverberate to the rest of the region if sanctions against Russia escalate, hitting natural gas supplies to Europe and weakening European banks.

The resulting impact could prompt further gyrations in financial markets, in contrast to the recent period of market calm, the IMF said in its 'spillovers' report.

In its worst-case scenario, the IMF said the United States and United Kingdom could tighten monetary policy sooner than expected, leading to higher borrowing costs worldwide, even as key emerging market growth slows a further 0.5 percentage point over the next three years.

The two developments would reinforce each other, prompting slower growth and hurting in particular those emerging markets with large economic imbalances, such as Argentina, Brazil, Russia and Turkey.

As in past reports, the IMF said monetary tightening in rich nations would have limited negative impact on the rest of the world if it was well-communicated and prompted by better growth prospects. The impact could also be muted if higher U.S. and UK rates come as the euro zone and Japan continue monetary easing, though this "asynchronous" tightening could cause more global exchange rate volatility.

Central banks in the United States, Japan, the euro zone and Britain sharply lowered rates to boost growth in the wake of the global financial crisis, but Britain and the United States are now preparing to reverse course.

The IMF said the more sluggish expansion in the developing world, long the engine of the global recovery, was increasingly likely due to structural, not cyclical, factors.

The IMF has downgraded growth projections for emerging markets by a cumulative 2 percentage points over the last four years. It now expects their annual growth to slow to a 5 percent rate over the next five years, from an average of 7 percent growth from 2003 to 2008.

"Given the significant and rising contribution of (emerging markets) to the global economy over the past few decades, their recent slowdown could have far-reaching implications," the IMF said.

Emerging markets affect the rest of the world largely through trade and financial channels; a 1 percentage point slowdown in emerging markets leads to a quarter of a percentage point loss in advanced economies, the IMF said.

But a slowdown in key emerging markets, especially Brazil, Russia, China and Venezuela, would also have a big impact on their immediate regions through avenues like oil prices and remittances.

Austrian, French, Italian and Swedish banks are particularly exposed to turmoil in Russia, in addition to holders of foreign bonds and underwriters for credit default swaps, which are affected when credit quality worsens.

(Reporting by Anna Yukhananov; Editing by Andrea Ricci)

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Comments (4)
speakfreely wrote:
What is displaced by sanctions against Russia can be replaced by other options. The IMF needs to be apolitical and be more creative.

Jul 29, 2014 1:16pm EDT  --  Report as abuse
Mott wrote:
What a timing? With people and property being destroyed with reckless disregard for any law and order and with the top-two girding openly for a fight, and you seem worried about growth over next 5 years?

Jul 29, 2014 2:32pm EDT  --  Report as abuse
brotherkenny4 wrote:
The presumption that borrowing is necessary is false. In fact, most developing nations can’t afford the debt, and typically their governments are so corrupt that a lot of the funds get siphoned to personal wealth. The idea that growth is necessary is also false. Most developing nations would do best to work on population reduction and meeting the basic needs of their people.

Jul 29, 2014 3:04pm EDT  --  Report as abuse
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