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 on Wednesday. ?A key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted.?
Stocks have tumbled in the past two months on concern that the global recovery will be derailed by the European debt crisis. Policy makers are diverging on prescriptions for sustaining the global recovery, with US Treasury Secretary Timothy F Geithner calling on Japan and European countries with trade surpluses to boost domestic demand, while Europe?s representatives have 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.
Europe?s debt crisis could disrupt global trade, hurting demand for Asian exports and sending ?hot money? into the region if policymakers fail to act swiftly and appropriately, he added.
Although Asia has limited financial links to euro zone economies, its stronger growth prospects could attract more capital flows to the region and lead to asset bubbles, said Shinohara.
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. While the outlook for exports has become ?challenging,? the region may avoid a major slowdown in growth should Western economies slump, according to HSBC Holdings Plc.
?The growth risk for Asia has certainly increased with fiscal consolidation on the agenda in Europe and the labour market not recovering as quickly as expected in the US,? said Frederic Neumann , co-head of Asian economic research at HSBC in Hong Kong. ?However, Asia has plenty of room to add extra stimulus, most notably in China.?
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 normalise and the ?strong? fiscal position in most Asian economies provides them with the ?space? to respond flexibly, Shinohara 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.?
?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.? 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.