By Emily Kaiser
SEOUL, Nov 12 (Reuters) - G20 countries' growth forecasts look "distinctly optimistic" and they could miss deficit reduction goals if the economy does not live up to their lofty expectations, the IMF warned in a report released on Friday.
The findings show only limited progress toward a Group of 20 goal of rebalancing the global economy, with current accounts expected to widen again toward pre-crisis levels.
The G20 agreed last year to a "Mutual Assessment Process" that involved submitting medium-term forecasts for International Monetary Fund review to determine whether national economic policies clashed globally.
If G20 countries adopt mutually beneficial policies, the IMF estimated 2014 GDP could be 2 percent, or $1 trillion, higher than would otherwise be the case, and 25 million more jobs would be created.
G20 countries submitted a first round of projections in April, but the IMF said at the time they looked overly ambitious. The resubmitted figures included lower growth targets, yet the forecasts "remain distinctly optimistic compared to past recoveries," the IMF said in the report, which was dated October 2010 but publicly released on Friday.
Collectively, the forecasts show G20 growth at 5 percent in 2014. That would be a step-up from next year's pace, which the IMF has pegged at 4.2 percent.
This mutual assessment process is at the heart of G20 efforts to smooth out imbalances between export-rich countries such as China and debt-burdened importers including the United States. The G20 authorized the IMF to release this report, but has yet to agree specifics on the next step -- setting up a monitoring system designed to spot imbalances that could destabilize the global economy.
The IMF said G20 countries were "broadly on track" to meet commitments agreed in Toronto in June to halve deficits by 2013, but warned that the budget projections rested on optimistic growth forecasts and could fall short.
Although G20 countries had trimmed their GDP forecasts since April, they predicted unemployment would fall even faster than initially anticipated. They estimated unemployment would return to its pre-crisis average level by 2014.
"A less optimistic growth outlook and a more optimistic employment outlook are not necessarily incompatible," the IMF said. "However, policy frameworks have not adequately explained the basis for better projected labor market outcomes against the deterioration in growth outcomes."
WHAT COULD GO WRONG?
The IMF said risks to growth had risen since the Toronto summit, and listed among its concerns a still-fragile financial system, sovereign debt risks, weak real estate markets, trade protectionism, and currency instability.
"Overall, the stance of G20 monetary policies remains broadly appropriate given members' circumstances, but greater exchange (rate) flexibility in major emerging economies is essential for meeting the growth objectives agreed by leaders," the IMF wrote.
Another area of concern was the interplay between slow-growing advanced economies and fast-growing emerging markets, which has become a growing source of global friction.
If debt-burdened rich countries retrench, but emerging markets don't pick up the slack, a "demand deficit" could develop, undermining the recovery.
It said exchange rate and other policies that could strengthen emerging market domestic demand were "not adequately spelled out" in the information submitted to the IMF.
The IMF has said repeatedly that China's tightly managed exchange rate remains undervalued, but did not specifically comment on that in this report.
In the only direct mention of the yuan it said: "China recently announced a return to a more flexible exchange rate regime. The RMB (yuan) has appreciated less than 2 percent against the U.S. dollar since the policy announcement, but day-to-day exchange rate volatility has increased markedly." (Editing by Tomasz Janowski)