IMF warns of hard landing in overheating Asia

Wednesday, 13 April 2011 00:01 - - {{hitsCtrl.values.hits}}

(Reuters) - Inflation is building in Asia’s fast-growing economies and officials must quickly tighten fiscal and monetary policy to ensure “boom-like dynamics” don’t get out of hand, the IMF said on Monday.

If policy fails to adjust enough to overheating pressures, near-term growth may surprise to the upside, the International Monetary Fund said in its World Economic Outlook.

“But that could sow the seeds for a hard landing down the road,” it warned.

The comments suggested growing concern that emerging markets, which had been a source of growth and stability during and after the financial crisis, were becoming a bigger risk.

If China were to suffer an abrupt slowdown from a credit and property boom-and-bust cycle, it would hurt the entire region, the Fund said. China’s efforts to contain credit growth may be undermined by banks’ financial innovation and off-balance-sheet activities, it said.

“Such boom-bust dynamics are also a possibility in other emerging Asian economies,” the IMF said.

Overall growth in developing Asian economies will likely hit 8.4 percent in both 2011 and 2012. Those forecasts were unchanged from the ones the IMF provided in January.

Although China, India and other Asian economies have raised interest rates, the IMF said monetary policy remained “generally accommodative” and the pace of fiscal withdrawal was slow given how rapidly the region has been growing.

Inflation is expected to continue increasing across much of the region, with price pressure most evident in India where inflation will likely average 7.5 percent this year.

“The further tightening currently expected by markets in some economies is not enough to prevent inflation from increasing,” the IMF said.

It stressed that greater exchange rate flexibility would be an important part of tightening. Although the IMF did not specify which countries needed more flexibility, that has been a common policy prescription for China.

Allowing currencies to move more freely would also help economies cope with heavy inflows of investment money, which can be a destabilizing and inflationary force.

The Fund said Asian economies had made little progress toward economic rebalancing and the projected trade surpluses were now larger than they were in October.