WASHINGTON The International Monetary Fund said on Friday that downside risks to global recovery have intensified due to recent turbulence in sovereign debt markets and continued weakness in the financial sector.
The IMF, in a briefing note prepared for Group of 20 deputy finance ministers, said global growth had been somewhat stronger than expected during the first half of 2010, "but is projected to slow temporarily during the second half of 2010 and the first half of 2011."
The Fund said European policy actions to calm the euro-zone sovereign debt crisis have eased market concerns.
"Renewed turbulence in sovereign debt markets could precipitate an adverse feedback loop between sovereigns and the financial sector, with spillovers to the real economy through higher bank funding costs, tighter lending conditions, and retrenchment in financial capital flows," it said.
The IMF also cited the U.S. property market as a source of downside risk, with increased foreclosures further pressuring bank balance sheets and possibly causing a reduction in credit available to the economy.
The G20 "surveillance note", prepared for a September 4-5 deputies meeting in Gwangju, South Korea, did not change any of the IMF's official forecasts. The Fund predicts global output will expand 4.6 percent in 2010 and 4.3 percent in 2011, compared to a decline of 0.6 percent in 2009.
The report did not specifically mention currency policies among the G20 members, which include top emerging markets China, India and Brazil. It did, however, say that sustained, healthy recovery in global growth rests on rebalancing of both internal and external demand.
Advanced economies must show a strengthening of private demand and an increase in net exports, while export countries, notably in emerging Asia, must rely more on internal demand and less on exports.
The IMF also called for the rebalancing to include credible plans by advanced economies to cut budget deficits in the future.
"This fiscal adjustment should begin in 2011, even if activity is modestly weaker than presently projected. Fiscal consolidation remains essential for strong, sustained growth over the medium term."
However, the IMF said that if growth threatens to slow appreciably more than expected, G20 countries should resort to monetary measures first, although it acknowledged that such defenses had "become thin". Some countries with budgetary breathing room may be able to temporarily delay their consolidation or let automatic stabilizers such as unemployment benefits to kick in.
(Reporting by David Lawder; Editing by Andrew Hay)