* Emerging market slowdown, higher U.S., UK rates dual
* IMF warns about wider impact of conflict in Ukraine
* IMF says financial markets may face more turmoil
By Anna Yukhananov
WASHINGTON, July 29 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
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
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)