The International Monetary Fund says in a February 23 report on the G20 finance ministers' meeting earlier this month that a two-speed global economy has left the West vulnerable to a weak recovery and emerging economies facing severe overheating.
The global economic recovery is advancing, the IMF says, albeit at an uneven pace; global GDP increased at a stronger-than-expected annualized rate of over 3.5% in the third quarter of 2010. "In G20 advanced economies, activity has moderated less than expected, but growth remains subdued and insufficient to significantly reduce still-high unemployment," it says. "In G20 emerging economies, growth remains robust, buoyed by strong domestic demand and the recovery of global trade, still-accommodative policy stances and resurgent capital flows. However, inflationary pressures are building, and there are emerging signs of overheating in some economies."
The inflationary pressures and risk of overheating in some of those emerging economies have been exacerbated by large capital flows and rising commodity prices. "A potentially steep correction of property prices in China have emerged as pertinent risks to the recovery," the IMF says.
In the developed markets, strains resulting from sovereign and banking sector risks in the more unstable parts of the Eurozone, those countries dubbed the PIIGS, pose a significant risk to the recovery in the region and possibly beyond. "Another downside risk stems from insufficient progress in developing medium-term fiscal consolidation plans, especially in the United States and Japan," it says.
To help reduce global imbalances, it says that for "G20 emerging economies, the key policy challenge is to keep overheating pressures in check and respond appropriately to capital inflows. In key surplus economies, overheating pressures can be alleviated by permitting currency appreciation, facilitating a healthy rebalancing from external to internal demand."
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