The growth in the global economy is likely to slow down towards the end of 2010, the International Monetary Fund has warned.
“Global growth has been somewhat stronger than expected during the first half of 2010, but is projected to slow temporarily during the second half of 2010 and the first half of 2011,” IMF said in a report to the Group-20 countries on global economic prospects.
The Fund said turbulence in financial markets has receded in recent weeks, but confidence remains fragile.
“Unprecedented European policy initiatives have eased concerns about sovereign solvency in the euro area, while market concerns have prompted the most vulnerable economies to front-load fiscal adjustment and some others to announce or adopt new consolidation measures,” it said.
In advanced economies, recovery remains fragile since employment and household consumption remain sluggish, although investment is beginning to show some strength.
In emerging economies, activity is fairly broad based, but growth is expected to moderate while remaining robust, the report said.
“The combination of sovereign risk and a still weak financial sector in many advanced economies poses significant risks to the recovery,” IMF said.
“Renewed turbulence in sovereign debt markets could precipitate an adverse feedback loop between sovereigns and the financial sector, with spillovers to the real economy through higher bank funding costs, tighter lending conditions, and retrenchment in capital flows,” it said.
The Fund said sustained, healthy recovery continues to rest on two rebalancing acts -- internal rebalancing, led by a strengthening of private demand in advanced economies; and external rebalancing, reflecting an increase in net exports in deficit countries and a decrease in net exports in surplus countries, notably emerging Asia.
Specific plans to cut budget deficits in the future need to be legislated soon in order to establish credibility and create room for fiscal policy manoeuvre, it said.
Arguing that fiscal adjustment needs to begin in 2011, even if activity is modestly weaker than presently projected, the IMF said fiscal consolidation remains essential for strong, sustained growth over the medium run.
At the same time, key emerging economies will need to further develop domestic sources of growth, supported by greater exchange rate flexibility, IMF said.