IMF: Investment bubbles could occur in emerging economies

Emerging economies could see asset bubbles form due to massive inflows of capital, says Dominique Strauss-Kahn, the head of the International Monetary Fund.

During a visit in Tokyo, the IMF official said that emerging Asian economies, China in particular, are spearheading the economic recovery. According to him, China, India and other emerging economies are about to return to pre-crisis levels, but the recovery of developed economies, such as the US and Japan, is happening slower.

According to Strauss-Kahn, the abundant inflows of capital into emerging markets such as China, Brazil and Russia are caused by the quick growth that investors are seeing in these countries. He warned however, that this could lead to numerous problems, including asset bubbles, and the sudden collapse of foreign investments, similar to the one that affected Eastern European countries during the global financial crisis.

On the other hand, Dominique Strauss-Kahn reminded that the IMF would revise upwards its forecast for the growth of the global economy. In October 2009, the IMF was expecting the world economy to grow by 3.1% this month.

"The forecasts we will release in a few days will prove that the recovery is quicker and stronger than we were anticipating a few months ago", said Dominique Strauss- Kahn. But the IMF official said that risk remains, even though he does not anticipate a W-shaped recovery. "We need to be very careful, since the recovery is fragile", Strauss-Kahn said, stressing that unwinding the government stimulus packages needs to be done carefully.

Dominique Strauss-Kahn said: "We now need to remedy the consequences of the policies that were used to fight the crisis. Picking the right moment for unwinding the stimulus policies is extremely difficult. If they are withdrawn too late, this can cause a loss in resources. If they are withdrawn too early, there is a risk of sliding back into recession".