No Need To Panic Yet ...

Source : TODAY, Monday, October 15, 2007

But IMF warns of slowing growth

WASHINGTON — Global finance chiefs gather in Washington this week with the impact of housing and credit woes in the United States spreading worldwide, exchange rate tensions rising and new agendas being carved out at the International Monetary Fund (IMF) and World Bank.

Meetings of the Group of Seven (G7) finance ministers, to be followed by annual gatherings of the IMF and World Bank, are being held against a backdrop of slowing global growth, but comments from key leaders suggest there is no reason to panic.

But IMF officials have said they expect to lower their forecast for global economic growth and estimates for major economies including the United States and Europe.

Sources said the IMF’s World Economic Outlook would lower its global forecast to 4.8 per cent growth from a previous estimate of 5.2 per cent.

The IMF’s outgoing chief Rodrigo Rato said in an interview with the Financial Times that the global credit squeeze that began with sub-prime US housing failures may not be over.

“Problems are going to come to the real sector, to (government) budgets — that is something we keep telling people,” he said.

Mr Rato said it would be “a few months, probably into next year” before credit availability returned to normal levels in the markets, which was “going to have an impact on growth”.

“The US is going to slow down ... Growth in Europe and Japan looks less strong than before,” said Mr Rato, who will be succeeded as IMF chief by former French Finance Minister Dominique Strauss- Kahn at the end of the month.

Other than the impact of the credit squeeze, some finance chiefs are worried that the weak US dollar and strong Euro will end up hurting a number of economies.

“On balance, there is plenty of reason to think that European growth is going to slow and that the euro itself has a very limited upside,” said Mr Robert Brusca of FAO Economics.

“No matter where they go, (eurozone) exports will not be able to escape the threat from lower-priced goods abroad,” he added.

European economies may feel the pinch from slower exports, but Japan’s low interest
rates will fuel the “carry trade” that puts more pressure on exchange rates.

Mr John Lonski, chief economist at Moody’s Investors Service, said a rise of the euro above US$1.50 would be a “shock” but probably manageable.

Of more concern would be a loss of confidence in the US dollar that could send tremors across a fragile global financial system, he noted.

This suggests the G7 will use much of their time discussing interest rates, following
the Federal Reserve’s halfpoint cut on Sept 18.

Expectations are running high for a boost in rates by the European Central Bank. Mr Lonski added that central banks would hope to avert a further pummelling of the US
dollar.

“I don’t think that other central banks would allow the US dollar to collapse,” he said. “It’s not in the interests of the world economy to allow the US dollar to enter a downward spiral.” — AFP