Recovery threatens new markets with capital floods - IMF

THE GLOBAL economy has staged a faster rebound than expected, the International Monetary Fund (IMF) said yesterday, but prospects are uneven and emerging markets face the prospect of a flood of capital inflows.

The fund’s updated forecasts came as the Institute of International Finance (IIF), representing the world’s largest banks, predicted capital flows to China, Brazil and other emerging markets would stage a remarkable bounce-back from the gloom.

Hot money flooding into emerging markets required sober management, both organisations warned, with the risk of new asset price bubbles developing and unbalanced world economic growth if poorer countries attempted to maintain weak currencies.

The IMF said it believed the world economy would grow by 3.9 per cent in 2010, an upward revision of 0.8 percentage points, and the recovery would accelerate in 2011 to 4.3 per cent. But emerging markets would significantly outperform more mature economies.

Advanced economies, led by unexpected strength in US consumption, are expected to grow by 2.1 per cent. Emerging markets, with China in the vanguard, are forecast to grow by 6 per cent. The IMF’s upward revisions for both groups was similar at just under one percentage point.

The fund attributed the surprising strength of the world economy to a rebound in confidence that helped people be more confident about taking risks and boosting economic activity. But officials warned temporary policy had been vital in securing growth.

IMF chief economist Olivier Blanchard said: “For the moment, the recovery is very much based on policy decisions and policy actions. The question is: ‘When does private demand come and take over?’ Right now it’s okay, but a year down the line, it will be a big question.”

The arena where the private sector has been most willing to take new risks has been in emerging markets, where growth prospects are the strongest.

Philip Suttle, chief economist of the IIF, said this was because, for the first time, “emerging market assets offer every prospect of higher returns but not higher risk than mature economy assets”.

The IIF predicted net private-sector capital flows to emerging economies would jump to $722 billion (€512 billion) this year from $435 billion in 2009. “Such a rapid move from famine to feast raises the obvious question of whether another global financial bubble is in the making, this time in key emerging economies, especially Brazil, China and India,” Mr Suttle added. – (Copyright The Financial Times Limited 2010)