Risk to global economy 'risen significantly'

Asia's economy, which has proved remarkably resilient during the worst global slump in three quarters of a century, could yet be badly damaged by the financial crisis in Europe, according to an IMF official.

Naoyuki Shinohara, a deputy managing director of the fund, told a conference in Singapore that the European situation was so severe that risks to the global economic recovery have "risen significantly".

While growth in economies such as China, India and South Korea barely slowed while the older advanced economies saw deep falls in output, Mr Shinohara warned: "Adverse developments in Europe could disrupt global trade, with implications for Asia given the still important role of external demand."

He urged East Asian economies to boost their economies to take up the slack created by retrenchment in Europe: "The key will be for policy-makers to keep an eye on the bigger picture and be ready to act swiftly as developments unfold. With Asia's economic muscle growing, the policy choices made in this region will have an important impact on the global economy.

"In the event of spillovers from Europe, there is ample room in most Asian economies to pause the withdrawal of fiscal stimulus," Mr Shinohara said.

Before the recession there was much speculation about how far the East Asian economies had "decoupled" from the rest of the world. The collapse in Western demand and the 12 per cent drop in world trade during 2009 did slow their growth, but their performance was much more impressive than the West's, protected as they were from the vicissitudes of international capital flows by vast foreign exchange reserves and relatively insular banking systems.

However, Mr Shinohara stressed that "there's not much to worry about at this moment". He also urged China to revalue the yuan.