IMF issues warning about emerging economies

<p>It said businesses and bank finances are “stretched thinner in many emerging markets”.</p>

The International Monetary Fund has issued a warning in a new report about the health of emerging economies and the impact this could have on global growth.

Emerging and developing economies are experiencing their fifth consecutive year of slowing economic growth and that is one of the key factors behind the increased risks to their financial stability, the institution said in its latest Global Financial Stability Report.

Company and bank finances are "stretched thinner in many emerging markets", with $3.3 trillion (£2.1 trillion) "overborrowed" in emerging markets, the reports adds.

"Global financial stability is not yet assured", senior IMF official Jose Vinals told the BBC. But the nature of the danger has changed, he said. "Financial stability in advanced economies has improved, but risks have moved towards emerging economies."

China's transition impacts emerging economies

The IMF believes the problem for the rest of the world is that China is transitioning from an exporting nation to an economy based more on services and spending by Chinese consumers. This leads to slower growth in Chinese demand for commodities, especially energy and industrial raw materials. 

The institution recently revised down its global economic growth forecast to 3.3 per cent in 2015, down from a 3.5 per cent initial forecast made in April.

IMF managing director Christine Lagarde said in a speech at the University of Indonesia in Jakarta last month that "Asia as a region is still expected to lead global growth".

"But even here, the pace is turning out slower than expected – with the risk that it may slow even further given the recent spike in global risk aversion and financial market volatility," she added.

The World Bank also announced last week it has revised down its growth forecast for the Asia Pacific region for 2015 and 2016.

It now expects growth in the region to be 6.5 per cent this year and 6.4 per cent in 2016, down from an earlier forecast of 6.7 per cent. In particular, China's economy is forecast to grow 6.9 per cent this year and 6.7 per cent in 2016, down from an earlier forecast of 7.1 per cent and seven per cent respectively.

It said the downgrade was due to risks posed from the slowdown in China and raising US interest rates.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.