World Economy

Recovery strong but risk shifts to emerging markets: IMF


The International Monetary Fund (IMF)'s latest world economic outlook argued that risks were rising for emerging markets, even as the recovery broadened in advanced economies.

Andrey Rudakov | Bloomberg via Getty Images

The IMF cut its emerging market growth forecast to 4.9 percent for this year and 5.3 percent for 2015 on Tuesday in its biannual report. Its forecast was down by 0.2 percent for 2014 and 0.1 percent for 2015 from its previous report in January.

Brazil and Russia were two of the main emerging nations whose growth forecasts were slashed. The IMF cut Russia's growth for 2014 by 0.6 percent to 1.3 percent growth, while Brazil was seen growing 1.8 percent this year, down 0.5 percent from the previous IMF prediction.

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The IMF report hinted at the possible global side effects of the U.S. Federal Reserve's tapering off of its aggressive monthly bond-buying program.

It said: "Risks could also come from unexpectedly rapid normalization of U.S. monetary policy, or from other bouts of risk aversion from investors. Either case could lead to financial turmoil, capital outflows, and difficult adjustments in some emerging market economies, with a risk of contagion and broad-based financial and balance of payments stress."

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The IMF noted that emerging market and developing economies contribute over two-thirds of global growth. It argued that emerging market policymakers should let exchange rates fluctuate; that monetary policy action was needed where high inflation was an issue; and that politicians must lower budget deficits as well as introduce further structural reforms.

China and India were seen maintaining stable growth over the next two years, with the IMF forecasting that the former would see growth of 7.5 percent through 2015.

However, Latin America will only see a modest growth, with Brazil's economic activity described as "subdued."

The pessimistic outlook for Brazil echoed that expressed by ratings agency Standard & Poor's (S&P), which downgraded the country's long-term debt rating to BBB-minus, one notch above"junk" status, in late March.

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Brazilian President Dilma Rousseff has struggled to revive the economy since the 2011 slowdown. S&P wrote: "The downgrade reflects… the prospect that fiscal execution will remain weak amid subdued growth in the coming years."

Russia and its neighbors also saw growth downgrades from the IMF on Tuesday due to the ongoing crisis in Ukraine's Crimea region and its broader consequences. The IMF stated that: "investment had already been weak, reflecting in part policy uncertainty. In emerging and developing Europe, growth is expected to decelerate in 2014 before recovering moderately in 2015."

Furthermore, the IMF warned: "Greater spillovers to activity beyond neighboring trading partners could emerge, if further turmoil leads to a renewed bout of increased risk aversion in global financial markets, or from disruptions to trade and finance due to intensification of sanctions and countersanctions."