IMF sees emerging economies vulnerable to U.S. tapering

Exclusive: IMF sees emerging economies vulnerable to U.S. tapering

11:14am EDT

By Gernot Heller

BERLIN (Reuters) – Advanced economies led by the United States will increasingly drive global growth while emerging countries are at risk of slowing due to tighter U.S. monetary policy, the International Monetary Fund said in a note obtained by Reuters on Wednesday. In the surveillance note, prepared for the Group of 20 meeting in St. Petersburg, the IMF urged strengthened global action to revitalize growth and better manage risks, warning that some downside risks have become more prominent.Emerging economies are seen particularly vulnerable to a tightening of U.S. monetary policy and the IMF recommended that policy makers be ready to handle a rise in financial instability.

“Policy makers should allow exchange rates to respond to changing fundamentals but may need to guard against risks of disorderly adjustment, including through intervention to smooth excessive volatility,” the IMF said.

The U.S. Federal Reserve may start tapering its stimulus program as early as this month, the IMF noted. The next Fed policy meeting is set for September 17-18.

“The greatest worry may well be a prolonged period of sluggish global growth (a plausible downside),” the IMF said, adding it was revising downwards its near-term projections for emerging economies. Brazil, China and India account for much of that slowdown.

But with the United States and other advanced economies picking up speed, the IMF said it still expected global growth to accelerate in 2014 from this year, helped by the highly accommodative monetary conditions in the rich world.

U.S. RECOVERY

Private demand, underpinned by recovering labor and housing markets, should further bolster the U.S. economy next year, though growth in Japan may become more subdued as a consumption tax increase takes effect and stimulus spending slows.

The IMF said it expected a continued recovery in the euro zone in the third quarter but said the 17-nation currency area needed to boost the supply of credit by repairing its banks’ balance sheets and making progress towards a banking union.

The euro zone’s economy expanded 0.3 percent in the second quarter on the back of stronger exports and a return to spending by households and governments, the European Union’s statistics office Eurostat said on Wednesday.

To help reduce global economic imbalances, the IMF urged surplus economies such as China and Germany to stoke domestic demand while deficit countries such as the euro area periphery and Britain should improve their external competitiveness.

Leaders of the G20, which groups the world’s largest economies, will meet in Russia’s second city of St. Petersburg on Thursday and Friday.