By Jenny Gross
Associated Press
JOHANNESBURG (AP) -- The International Monetary Fund said Tuesday that the uneven pace of recovery between sluggish advanced economies and buoyant developing ones will lead to financial instability for the next two years, and growth in developed countries will not be strong enough to address the unemployment crisis.
Citing a new report on global financial stability, IMF Financial Counselor Jose Vinals said "financial stability is still at risk" because of failures to impose regulatory reforms and policies to tackle fiscal and banking sector vulnerabilities that caused the worst crisis since the Great Depression.
Nearly four years after the last crisis, the report complained that "significant policy challenges remain to be addressed." Interaction between banking and sovereign credit risks in the euro zone remains "a critical factor." Globally, "regulatory reforms are still required to put the financial sector on a sounder footing."
The report anticipates that the economies of advanced countries will expand by 2.5 percent in the next two years while emerging and developing countries are expected to continue a strong rebound and grow by 6.5 percent in the same period.
Advanced economies are increasingly sensitive to accumulated debt, it says, while policy makers in emerging markets like Brazil and China are grappling with how best to absorb the capital inflow from rising commodity prices and investors without overheating their economies.
The IMF raised its projections for overall global economic output to an expansion of 4.4 percent in 2011, slightly higher than the 4.2 percent anticipated in the Washington-based institution's October report, but slower than the 5.0 percent achieved in 2010.
That is not good news for those who lost jobs.
"Unemployment is still very high and (that growth) is not going to be able to make a big dent in unemployment," said chief IMF economist Olivier Blanchard.
It said this reflected stronger activity in the last half of 2010 and the new U.S. policy initiative that is expected to boost growth in that country by 0.5 percent.
On the back of Washington's new fiscal package, the IMF gave the United States the largest projected increase compared with its October report, raising anticipated economic growth in 2011 from 2.3 percent to 3 percent.
Sub-Saharan Africa is expected to show the strongest regional progress, at 5.8 percent. The IMF reflected that confidence by releasing its new report Tuesday in Johannesburg, South Africa, the continent's biggest economic engine.
The report showed no change in its forecasts for the rest of the world with Asian giants leading the way: China at 9.6 percent and India at 8.4 percent growth. Also unchanged was the forecast for Japan and the 17-country eurozone, at 1.5 percent.
Blanchard said capital flows to emerging market countries were "both a blessing and potentially a curse," providing cheap imports but the danger of overheating economies trying to handle the large influx of funds. The influx was "a combination of the fact that the countries are doing well so their growth prospects are very good, and the fact that interest rates in advanced countries are not so high, they are very low, so there's a strong incentive to take your funds to emerging market countries."
Progress in advanced economies will be slow coming, he warned. They are "in a fiscal hole, large debt, large deficit and these have to be slowly eliminated and that's going to take a long time."
Published: Wed, Jan 26, 2011
