World Economic Growth Robust But Risks Remain: IMF

Source : The Business Times, October 18, 2007

Asian and other emerging markets still face overheating pressures, it says

ON present indications, the global economy should weather recent financial market turbulence quite well with the overall world economy growing by a robust 5.2 per cent this year, slackening only to 4.8 per cent next year, says the International Monetary Fund (IMF) in its latest World Economic Outlook published yesterday.

But the risks 'are firmly on the downside', the IMF warns in its latest bi-annual report. The chief reason for this unusually heavy qualification to the global economic outlook 'centres on the concern that financial market strains could deepen and trigger a more pronounced global downturn', says the report. Additional risks include 'potential inflationary pressures, volatile oil markets, and the impact on emerging markets of strong foreign exchange flows', it adds.

Underscoring these warnings, the IMF said in its Global Financial Stability Report Update published on Tuesday that while the worst of the recent turmoil in leading world financial markets appeared to have subsided, 'the period of adjustment will take some time and setbacks are possible'.

The reports came as leading US banks Citigroup, JPMorgan and Bank of America announced they were launching a 'super-fund' to buy US$75-100 billion of financial assets from so-called structured investment vehicles or SIVs set up by major banks and asset management groups with the aim of injecting liquidity and confidence back into financial markets shaken by recent turmoil.

The baseline economic forecast in yesterday's IMF report assumes that market liquidity is gradually restored in coming months and that the interbank market reverts to more normal conditions, although wider credit spreads are expected to persist.

But 'there remains a distinct possibility that turbulent financial market conditions could continue for some time (with) a significant dampening impact on growth', the report says.

'In the United States, tightening lending standards are likely to crimp the overall supply of credit to the housing sector, and weaker borrowers will face higher mortgage rates,' the report suggests. This could feed through to reduce consumption, with an adverse impact upon US import demand which would impact the global economy.

The sharpest downgrade in growth forecast for next year is in the US where the economy is projected by the IMF to expand at 1.9 per cent next year - a near one percentage-point downgrade over its previous forecast.

If signs are that US growth is likely to continue below trend, that would 'justify further interest rate reductions' there, says the report, although US Federal Reserve chairman Ben Bernanke said on Monday that the recent 0.5 per cent cut in rates had reduced risks to the near-term outlook.

Another cause for concerns is the fact that 'oil prices have risen to new highs and a further spike in prices cannot be ruled out, reflecting limited spare production capacity, says the report.

As a backdrop to the IMF warnings, crude oil prices jumped to an all time high of above US$86 a barrel this week amid warnings of tight supplies ahead of the winter peak in demand for energy.

Asian and other emerging market economies, meanwhile, 'still face overheating pressures and rising food prices', the latest IMF report notes. 'Further monetary tightening' may be required in these markets while policy-makers are likely to have to balance the need for higher rates with 'strong foreign exchange inflows' that threaten overheating of some emerging market economies. 'There is no simple formula for dealing with these flows,' the IMF says.