US is back in harness

The US and other advanced economies will increasingly drive global growth whereas emerging countries are at risk of slower development due to a tighter US monetary policy, the International Monetary Fund said yesterday.

In a "surveillance note" prepared for the Group of 20 meeting in StPetersburg, Russia, the IMF said that emerging economies were particularly vulnerable to a tightening of US monetary policy.

It urged strengthened global action to revitalise growth and better manage risk.

The IMF recommended that policy makers be ready to handle increased financial instability.

"Policy makers should allow exchange rates to respond to changing fundamentals but might need to guard against the risks of disorderly adjustment, including [those caused by] intervention to smooth excessive volatility," the IMF said.

The US Federal Reserve might start tapering off its stimulus programme as early as this month, the IMF noted.

The next policy meeting of the Federal Reserve Board is on September 17-18.

"The biggest worry might well be prolonged sluggish global growth," the IMF said, adding that it was lowering its near-term projections for emerging economies.

Brazil, China and India account for much of that slowdown.

But, with the US and other advanced economies picking up speed, the IMF said it still expected global growth to accelerate next year, helped by the highly accommodating monetary conditions in the developed world.

Private demand, underpinned by recovering labour and housing markets, should further bolster the US economy next year.

But growth in Japan might be subdued as consumption tax increases take effect and stimulus spending slows.

The IMF said it expected a continued recovery in the eurozone in the third quarter but said the 17-nation currency area needed to increase the supply of credit by repairing its banks' balance sheets and making progress towards a banking union.

The eurozone economy expanded 0.3% in the second quarter because of stronger exports and a return to spending by households and governments, the EU's statistics office, Eurostat, said yesterday.

To help reduce global economic imbalances, the IMF urged economies that were in surplus on their current account, such as China and Germany, to stoke domestic demand.

It called on countries with a deficit economy, such as Britain, to improve their competitiveness.

Leaders of the G20, the world's largest economies, will meet tomorrow and on Friday.

The summit is overshadowed by the increasingly volatile situation in Syria, which has split the G20 nations and could make agreements difficult.