Growth in emerging and developing economies is expected to slow in the medium term owing to the worsening external environment and a weakening of internal demand, the International Monetary Fund (IMF) said on Tuesday.
In the latest run of the World Economic Outlook (WEO), the multilateral lender said that growth in emerging and developing economies slowed more than forecast, possibly because of a greater-than-expected effect of macroeconomic policy tightening or weaker underlying growth.
“The near-term outlook has noticeably deteriorated, as evidenced by worsening high-frequency indicators in the last quarter of 2011. The main reason is the escalating euro area crisis, which is interacting with financial fragilities elsewhere,” the IMF said.
It specified concerns about banking sector losses and fiscal sustainability have widened sovereign spreads for many euro area countries, which reached highs not seen since the launch of the Economic and Monetary Union. The IMF said, however, that although projections see global activity decelerating, it is not collapsing.
“Most advanced economies avoid falling back into a recession, while activity in emerging and developing economies slows from a high pace. However, this is predicated on the assumption that in the euro area, policymakers intensify efforts to address the crisis,” the lender said.
The IMF said that during 2012-13, growth in emerging and developing economies is expected to average 5.4 percent—a significant slowdown from the 6.2 growth registered during 2010-11 and about 50 percentage points lower than projected in the September 2011 WEO.
“This reflects the deterioration in the external environment, as well as the slowdown in domestic demand in key emerging economies. Despite a substantial downward revision of + percentage point, developing Asia is still projected to grow most rapidly at 7+ percent on average during 2012–13,” the IMF said.
It added that the most immediate risk is the intensification of the adverse feedback loops between sovereign and bank funding pressures in the euro area, resulting in much larger and more protracted bank deleveraging and sizeable contractions in credit and output.
“In key emerging economies, risks relate to the possibility of a hard landing, especially in the context of uncertain [possibly slowing] potential output,” the IMF said.
The lender also said that concerns about geopolitical oil supply risks are increasing again. The oil market impact of intensified concerns about an Iran-related oil supply shock or an actual disruption would be large, given limited inventory and spare capacity buffers, as well as the still-tight physical market conditions expected throughout 2012, it said.
The IMF urged emerging and developing economies to focus on responding to moderating domestic demand and slowing external demand from advanced economies, while dealing with volatile capital flows.
“The specific conditions facing these economies and the policy room available to them vary widely, and so will the appropriate policy response,” it added. –Lailany P. Gomez, Reporter, Manila Times
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