While growth is expected to remain robust in G-20 emerging economies, including India, inflationary pressures are building, and there are signs of overheating in many economies, according to the International Monetary Fund (IMF).
Trade and bio-fuel policies have contributed to recent food price volatility, the IMF said in a note prepared for last week's meeting of G-20 Finance Ministers and Central Bank Governors.
Policy support for bio-fuel production and consumption remains important in some economies, including the United States, the European Union, Brazil, and to some extent in India, said the note on Global Economic Prospects and Policy Challenges
The recovery is gaining strength, but output gaps and unemployment remain high in advanced economies, while new macroeconomic risks are building in emerging economies, the IMF said.
All countries face a new challenge of higher commodity prices, which have increased due to strong demand and supply uncertainties, it said noting this is leading to higher headline inflation. Financial risks have eased, but new risks have emerged.
In G-20 advanced economies, the recovery is becoming more self-sustained, the IMF said.
Growth will, however, remain too low to substantially reduce output gaps and still-high unemployment, reflecting the continuing impact of pre-crisis imbalances (eg, housing) and crisis-related damage (eg, financial systems and fiscal positions), it said.
Slow growth and inadequate policy responses in advanced economies will keep fiscal positions and financial systems vulnerable to shocks, especially in peripheral Europe, but also elsewhere.
In some emerging economies, credit booms and overheating threaten eventual hard landings. Oil and food prices remain subject to supply uncertainty and upside price risks.
Key policy challenges are to strengthen growth in advanced economies, moderate growth in emerging economies, and reduce risks, the IMF said.
In advanced economies, financial sector repair and reform, notably in the euro area, should proceed expeditiously, it said.
In emerging economies, the challenge is to avoid overheating in the face of closing output gaps and higher capital flows.
For the recovery to be sustained, advanced countries must achieve fiscal consolidation, the IMF said suggesting that to do so and maintain growth, they need to rely more on external demand.
Symmetrically, emerging economies must rely less on external demand and more on domestic demand, it said.
Appreciation of emerging economies' currencies relative to advanced economies' currencies is an important part of this adjustment, the IMF said.