LONDON Emerging economies that have thrived on ultra-loose U.S. monetary policy and insatiable Chinese demand for natural resources are in for another rude wake-up call this week.
The twin tailwinds are not turning into outright headwinds. Federal Reserve Chairman Ben Bernanke will explain - yet again - in two days of congressional testimony that his plan to buy fewer bonds is not the same as raising interest rates.
And while China's days of double-digit growth are over, data on Monday should show the world's second-largest economy expanded around 7.5 percent in the second quarter from a year earlier - a pace most countries can only dream of.
Still, the trends are clear, and they make an uncomfortable backdrop for a meeting in Moscow of finance ministers and central bank chiefs from the Group of 20 leading economies.
The International Monetary Fund last week revised down its global growth projection for this year by a quarter-point to 3.1 percent, which Bart van Ark, chief economist in New York with the Conference Board, a business research group, said was between one and 1.5 percentage points below potential.
The U.S. recovery, though weak by historical standards, is putting down roots, as housing starts and retail sales figures for June are likely to demonstrate.
"Fed policy might be right for the United States. The question is whether it's right for the rest of the global economy," van Ark said.
"Can the patient can be taken off the life support that central banks are giving them and moved into rehab? I think it's very questionable whether some economies are ready for that. And the biggest risk in that respect is emerging markets," he added.
Capital outflows top the risk list. Indonesia and Brazil raised interest rates last week, India tightened derivatives trading rules as the rupee plunged to a record low and Turkey's central bank was a big seller of dollars to defend the lira.
Brian Reading with Lombard Street Research, a London research firm, added sagging commodity prices and slack final demand in advanced economies to the litany of woes.
"Developing countries face a triple whammy - falling markets, falling prices and diminished capital inflows, particularly if interest rates in developed countries chase U.S. rates higher," he said in a report.
SPEAK CLEARLY, BEN
No wonder that G20 host Russia is anxious that an abrupt withdrawal of monetary stimulus by rich-country central banks, especially the Fed, could spell turmoil for emerging markets.
"I think everyone will be against any sudden changes in currency exchange rates and monetary policies," Finance Minister Anton Siluanov told Reuters.
Bernanke has sought to allay such concerns by setting out an indicative timetable for phasing out the Fed's bond buying while stressing that policy will remain loose for a long time.
Some market watchers have praised the Fed chief for his transparency and clarity.
But Steven Ricchiuto, chief economist with Mizuho in New York, said Bernanke's attempt to convey the nuanced views of the Federal Open Market Committee (FOMC), the Fed's policy-setting panel, had turned into a public relations nightmare.
"Market participants prefer sound bites. As such, the more the chairman tries to explain the FOMC's position on tapering and policy accommodation the more he confuses the message," Ricchiuto said.
If that's the case, then Bernanke is not alone.
Chinese Finance Minister Lou Jiwei had economists puzzled after he said China could meet its 7 percent growth goal but that should not be considered the bottom line.
The confusion arose because the Communist Party set a 7.5 percent growth target for 2013 as recently as March, while its current five-year plan for 2011-2015 is based on expectations of 7.0 percent annual growth.
Sure enough, the official Xinhua news agency carried a correction on Saturday, clarifying that Liu had actually said, "There is no doubt that China can achieve this year's growth target of 7.5 percent".
SECOND-GUESSING CHINA'S COMMUNIST PARTY
Cutting through the fog, it is clear that Beijing's new leaders are serious about rebalancing the economy away from investment and will tolerate slower growth in the process.
Ting Lu, Bank of America Merrill Lynch's China economist, said before Xinhua's correction that he suspected there had been a misunderstanding over the timeframe for Liu's 'growth floor' remarks and that this year's floor would remain 7.5 percent.
But he added: "We think it's quite possible for the government to set the growth target in 2014 at 7.0 percent, and we do predict that growth will slow to 5.0-6.0 percent towards the end of this decade."
Derek Scissors with the Heritage Foundation, a Washington think tank, said GDP was a misleading indicator of China's economic health; it was more important to track the progress of reforms and indicators of efficiency, notably the return on capital.
He said he was encouraged by Beijing's efforts to reel in credit, but a sterner test would be its capacity to curb wasteful investments by state-owned enterprises.
"If they stop doing that, that's step one in creating a sustainable growth trajectory," he said.
Scissors said a key Communist party policy-setting meeting this autumn was unlikely to endorse sweeping changes due to opposition from vested interests.
But he saw more than a 50-50 chance of a significant reform being implemented in 2014 - for example, making it easier for migrant workers to settle in cities or punching a hole in China's capital controls.
"You're not going to reform on all fronts at the same time," Scissors said. "But I think we can get a healthier economy than we have now a year from now: the reform process will have started and started to help the economy," he said.
(Editing by Jeremy Gaunt.)