The International Monetary Fund has warned Australia and its Asia-Pacific neighbours that policymakers face a ''delicate balancing act'' between concerns over the global growth outlook and high inflation pressures.
In its latest Asia-Pacific Regional Economic Outlook, the IMF cautions that risks for the area are ''decidedly tilted'' to the downside.
''An escalation of the euro area financial turbulence and a more severe slowdown than anticipated in the United States would have clear macro-economic and financial spillovers to Asia,'' the report published in Tokyo yesterday says.
''While domestic demand remains strong, Asia has clearly not 'decoupled' from advanced economies.''
The IMF estimates that under a severe global downturn scenario - where growth in the European Union falls by 3.5 per cent below its current forecast for two years, leading to a 1 per cent slowdown in US growth over the same period - growth in the Asia-Pacific region could fall by 1.5 to four percentage points from current estimates, in the absence of policy responses.
A spokesman for Treasurer Wayne Swan said Australia and Asia were clearly not immune from negative developments on both sides of the Atlantic.
''If the worst fears are realised for Europe, that will inevitably flow through to our region, our economy and our budget bottom line,'' he said.
Mr Swan left for Paris yesterday for this weekend's G20 finance ministers' meeting, where he will be pushing for swift action by European policymakers to recapitalise their banking system and put their budgets on a sustainable footing.
At this stage, the IMF still expects the Asia-Pacific region to continue to grow at solid rates. In its latest growth projections, it expects Asian gross domestic product to grow at 6.3 per cent this year and 6.7 per cent next year. It reaffirmed Australia's outlook of 1.8 per cent this year and 3.3 per cent next year.
Australia's No1 trading partner, China, is expected to grow at 9.5 per cent this year, and 9 per cent next year. In Japan, it forecasts growth of 2.3 per cent next year after a contraction by 0.5 per cent this year.
However, a rise in global risks could spill over to concerns about the sustainability of its sovereign debt, leading to tighter financial conditions.
''Australia would be affected through a sharp decline in the demand for and prices of commodities, as well as likely pressure on bank funding,'' the Washington-based institution says.
In a separate report on Australia published last Friday, the IMF warned that a fall in house prices, which it believes are overvalued by 10 to 15 per cent, could hurt consumer confidence further and depress consumption growth.
''Despite our fundamental strengths and proven track record for dealing with instability, we know that the Australian economy and our budget will not remain untouched by global events,'' Mr Swan's spokesman said. ''We are nonetheless better placed than almost any advanced economy because of the actions we took during the global financial crisis.''
