Global growth is slowing rapidly and the possibility of ample economic slack means risks of damaging deflation are rising in some G20 member economies, the International Monetary Fund said in a paper published on Wednesday.
Should growth turn out lower than expected, there is a risk that very large output gaps would lead to deflation in some countries, with damaging consequences where debt burdens remain high, the IMF said in a document presented at a G20 meeting in Mexico last week.
The IMF, which on Tuesday scaled back its forecasts for global growth this year, said it appears recovery will stall in many economies during 2012 but said a collapse should be avoided.
With demand likely to soften, price declines are likely in many commodities and that will feed through to consumer prices and add to chances for deflation.
Overall, the IMF identifies the ongoing European debt crisis as a key risk to the global economy and notes the region has large debt rollover needs in 2012 that are equal to about 16 percent of total economic output.
Successful debt issuance will require a durable recovery of market confidence about prospects for both growth and fiscal sustainability across the euro area, the IMF said.
But it also says the United States and Japan face a threat to their prospects from their failure to come up with credible, medium-term plans for reducing their heavy levels of debt and borrowing.
The IMF cautions that while the United States and Japan's sales of debt may look attractive to investors at the moment in comparison with those of Europe, that could change quickly and politicians need to get a grip on debt reduction.
As developments in the euro area have shown, market confidence can be lost quickly with damaging consequences for growth and financial stability, underscoring that time is of the essence, the IMF document said.
(Reporting By Lesley Wroughton; Editing by James Dalgleish and Andrew Hay)