The risks to a robust global recovery have “risen significantly” as many governments struggle with debt, a top International Monetary Fund official has warned.
“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,” Naoyuki Shinohara, the IMF's deputy managing director, said in Singapore on Wednesday.
“The global outlook remains unusually uncertain and downside risks have risen significantly,” Shinohara said, according to Britain's Daily Telegraph.
Countries across Europe are being pressured to slash their deficits, which were deepened by the financial crisis and the governments’ response to it.
Some economists fear that moves by countries ranging from Britain to Spain to rein in public spending at the same time will set back a global recovery, the Telegraph reported.
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, Shinohara said, according to Reuters.
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, Shinohara said.
“In the event of spillovers from Europe, there is ample room in most Asian economies to pause the withdrawal of fiscal stimulus,”` Shinohara said.
"A key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted,” Shinohara said.
"The key will be for policymakers to keep an eye on the bigger picture and be ready to act swiftly as developments unfold," Shinohara said.
"With Asia's economic muscle growing, the policy choices made in this region will have an important impact on the global economy," he said.
Shinohara, however, also said the economic situation in Hungary, the latest European country to run into financial difficulties, wasn't as serious as portrayed in some media reports, according to Reuters.
Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong, told Bloomberg that the “growth risk for Asia has certainly increased with fiscal consolidation on the agenda in Europe and the labor market not recovering as quickly as expected in the U.S.”
“However, Asia has plenty of room to add extra stimulus, most notably in China,” Neumann said.
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