IMF Says Risks to Economy Have Risen ‘Significantly’

June 9 (Bloomberg) -- Risks to the global economic outlook have “risen significantly” and policy makers have limited room to provide support to growth, International Monetary Fund Deputy Managing Director Naoyuki Shinohara said.

Most advanced economies are experiencing a “subdued” recovery, Shinohara said in a speech in Singapore today. “A key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted.”

Shinohara’s remarks come days after finance chiefs from the Group of 20 diverged on prescriptions for sustaining the global recovery. U.S. Treasury Secretary Timothy F. Geithner called on Japan and European countries with trade surpluses to boost domestic demand, while Europe’s representatives said reining in budget deficits was the top priority.

As advanced economies suffer stunted recoveries, Asia will continue to lead the world economic rebound, according to Shinohara, the former top currency official at Japan’s Ministry of Finance. That brings its own challenges, with increasing capital inflows and the risk of overheating if policy makers fail to take “appropriate” action, he said.

“After nearly two years of global economic and financial upheaval, shockwaves are still being felt, as we have seen with recent developments in Europe and the resulting financial market volatility,” Shinohara said. “The global outlook remains unusually uncertain and downside risks have risen significantly.”

Withdrawing Stimulus

Asia’s rebound is outpacing the rest of the world as companies from Nissan Motor Co. to Taiwan Semiconductor Manufacturing Co. increase exports and domestic spending strengthens. Some of the region’s central banks have started to withdraw monetary stimulus to stem inflation and asset bubbles while others are reluctant to increase borrowing costs on concern the European debt crisis may thwart the global economic recovery.

Macroeconomic policies have “appropriately” begun to normalize and the “strong” fiscal position in most Asian economies provides them with the “space” to respond flexibly, Shinohara said.

Still, Asian governments said last month public debt risks and “destabilizing” capital flows are among threats to the region’s recovery.

Capital Flows

“Should the recovery continue as expected, Asia’s bright growth prospects, together with low interest rates in major economies, would likely attract more capital,” Shinohara said. “This could lead to risks of overheating in some economies if appropriate policy action is not taken. On the other hand, further increases in global risk aversion could see capital flows change direction quickly.”

The escalation of Europe’s debt crisis forced the European Union and the International Monetary Fund to offer as much as 750 billion euros ($897 billion) to countries in danger of financial instability.

Group of 20 finance officials who gathered earlier this month signaled deeper concern about the economic and fiscal outlooks than when they last met in April. In a statement after their June 5 meeting, the finance chiefs promised to “safeguard recovery,” yet replaced an endorsement of budget stimulus with a pledge to pursue “credible, growth-friendly measures to deliver fiscal sustainability.”

“Adverse developments in Europe could disrupt global trade, with implications for Asia given the still important role of external demand,” Shinohara said today. “In the event of spillovers from Europe, there is ample room in most Asian economies to pause the withdrawal of fiscal stimulus.”

Useful Controls

Asian policy makers have a range of tools to manage capital flows, Shinohara said.

“Most countries in Asia also have room to address the impact of capital flows through more exchange-rate flexibility,” he said. “In some exceptional circumstances, controls on capital flows may be useful and can provide temporary breathing space during periods of large swings in capital flows.”