THE MUSIC HAS STOPPED FOR BRAZIL, RUSSIA, INDIA, CHINA, AND THE EURO

The International Monetary Fund has thrown in the towel on emerging markets. After years of talking up the BRICS club of Brazil, Russia, India, China, and South Africa, it now admits that these countries have either exhausted their catch-up growth models, or run into the time-honored problems of supply bottlenecks and bad government. Yes, China too.

The Fund has cut its forecast for the developing economies by 0.5% to 4.5% this year in its latest World Economic Outlook, and by 0.4% to 5.1% next year.

The 2013 estimates have been slashed by 1.8% for India, for Mexico by 1.7%, and 1% in Russia, compared to forecasts made in April. Similar damage is expected for Turkey, Indonesia, Ukraine, and others with big trade deficits as details are fleshed out.

The IMF was caught off guard by the ferocity of the emerging market rout when the Fed began to talk tough in May, threatening to turn down the spigot of dollar liquidity that has fuelled the booms — and masked the woes — in Asia, Latin America, and Africa.

In what amounts to a mea culpa, the IMF hinted that it had for long been blind to festering problems in the BRICS and mini-BRICs.

It said the economies of Brazil, China, and India will be 8% to 14% smaller in 2016 than had been assumed just two years ago, a revision that calls into question some of the giddiest claims that the newcomers will soon surge past the decaying West.

Since emerging markets now make up half the global economy, the IMF has had to cut its world forecast to 2.9% this year and 3.6% in 2014, with plenty of "downside risks," especially in Europe.

"Global growth remains in low gear. A likely scenario for the global economy is one of continued, plausible disappointments everywhere," said the IMF. The gloomy `tour d’horizon’ suggests once again that frothy markets fuelled by easy money have decoupled from underlying reality of stagnant output.

The report pours scorn on claims that the eurozone is safely out of the woods, warning that little has been done to change the warped structure of monetary union.

The crisis-stricken states of Southern Europe face many more years of wage cuts and "internal devaluations" to claw back lost competitiveness and reverse the huge imbalances that built up in the early years of monetary union.

The IMF warned that Europe’s debt crisis may erupt again unless the European Central Bank takes action to stop the contraction of bank credit, and EU leaders deliver on their summit pledges.

"Absent a true banking union, including a strong single resolution mechanism backed by a common fiscal backstop, financial markets remain highly vulnerable to shifts in sentiment," it said.

At best, the eurozone is expected to grow by 1% in 2014 after shrinking by 0.4% this year. The Fund sketched a "plausible downside scenario" entailing a lost decade, with growth never rising above 0.5% as far as 2018, and Southern Europe trapped in perma-slump.

"Unemployment rates would stay at record highs for many years in the euro area periphery, and concerns about debt sustainability would return to the fore," said.

It rebuked Europe’s creditor powers failing to do their part to bridge the intra-EMU North-South gap by stimulating demand, and rebuked the ECB for its passive stance, allowing chronic problems to fester.

"The ECB should consider additional monetary support, through lower policy rates, forward guidance on future rates, negative deposit rates, or other unconventional policy measures. Since these factors reinforce each other, a vigorous response on all fronts offers the best way forward. In the absence of a comprehensive policy response, matters could easily worsen."

Crucially, the Fund disputed claims by EU officials that Club Med states have cut labor costs and reduced current account deficits by enough to restore their economies to a viable footing within EMU.

It said better appearances are largely an illusion of the cycle, and the result of crushing internal demand. "Current account deficits could widen again significantly when cyclical conditions improve," it said.

The harsh reality is that the net foreign positions of Greece, Ireland, Portugal, and Spain will still be minus 80% of GDP near the end of the decade. The IMF said it will take years of hard grind to reverse all the damage, no easy task as "adjustment fatigue" sets in.

The BRICS malaise is of a different character. The IMF said the a string of economies are caught in a classic Phillips Curve trap, with sticky inflation even as growth plummets.

This mix is a sign that the problems go deeper than the boom-bust effects of the credit cycle. Their economic speed limit has slipped badly, implying "serious structural impediments".

The IMF said "time is running out" on China’s growth model, driven by a world-record investment rate of 50% of GDP, and now afflicted by "excess capacity and diminishing returns."

China has picked the low-hanging fruit of catch-up growth, relying on mass migration of cheap labor from the countryside. The work force will shrink next year. The "reserve army" of peasants in the interior will have disappeared by 2020 as the "Lewis Point" bites in earnest, forcing up wage costs.

The Fund is confident that emerging market will muddle through. Growth will settle near 5.5%, still higher than it was in the 1980s and early 1990s. What seems clear is that the roaring boom is not going to return for a long time, if ever.

Ambrose Evans-Pritchard is the International Business Editor of the London Telegraph.