THE growth rate of emerging economies in Asia and elsewhere is set to slow to 5 per cent on average over the next five years compared with rates nearer 7 per cent in the run-up to the 2008 global financial crisis, the International Monetary Fund (IMF) said yesterday.
This lasting slowdown from former growth peaks threatens to have an adverse "spillover" impact on recovery in advanced economies, which in turn suggests "spillback" effects on emerging economies, it said in a report. The result could be a 2 per cent drop in global output.
The IMF report comes at a time when capital flows from advanced to emerging markets are close to record levels. Yesterday, the Institute of International Finance (IIF) said in a separate report that this may reflect "overconfidence" among investors about the impact on emerging markets of monetary tightening in the US and elsewhere.
Monetary conditions in advanced economies - the US and the UK especially - are set to "normalise", the IMF said in its latest Spillover Report, which assesses the impact of policy actions in one country on others.
This implies tighter financial conditions and rising interest rates on a global basis.
If monetary tightening is associated with economic recovery in advanced economies, emerging markets will gain through increased demand and trade.
But if tightening is caused by market concerns over financial stability, emerging markets could suffer prolonged damage, the IMF said.
According to the Washington-based IIF, which speaks on behalf of the world's biggest banks and other financial institutions, portfolio capital flows to emerging markets in July "accelerated to a new two-year high".
"Emerging markets have rebounded strongly from last year's taper tantrum and are on track for record inflows this year, propelled by avid risk appetite and little concern about the prospect of rising global interest rates," said IIF chief economist Charles Collyns.
"Investors seem confident - perhaps overconfident - that Fed exit will unfold very gradually."
The IMF cautioned, meanwhile, that interest rates are expected to rise as some major advanced economies begin to unwind their extraordinary stimulus and as recovery takes hold. This means that central banks will face "complex challenges in achieving a smooth unwinding".
Markets may "reassess growth prospects in emerging markets if there are renewed bouts of financial turbulence as advanced economies normalise policy", noted Hamid Faruqee, head of the taskforce that produced the IMF report. Such a reassessment could, in turn, generate further stress, he said.
"Two features stand out when comparing the current slowdown with other such episodes: medium-term forecasts have been revised down continuously since 2010, and a slowdown in productivity is more visible this time around. The slowdown thus appears to have a large structural component.
"Given the significant and rising contribution of these economies to the global economy over the past few decades, such a protracted slowdown will likely weigh on global growth through trade and finance channels."
The IMF said: "With recovery uneven across advanced economies - faster in the US and UK than in the euro area and Japan - monetary action will proceed at different times which has possible spillovers implications."
Emerging economies "are slowing in a synchronised and protracted manner" - a trend that threatens to have "sizeable spillovers on the rest of the world through trade and finance". These two risks could intersect and interact with each other, the IMF said.