US Recession Fears Overblown: IMF

Source : The Business Times, December 13, 2007

But official says US growth outlook has become subject to greater risks

(WASHINGTON) World economic growth may be hobbled by financial market turmoil and the risks to the United States have mounted, said IMF first deputy managing director John Lipsky, but fears of a recession still look overdone.

'Never say never, but the latest indicators do not justify such a conclusion,' Mr Lipsky told an internal IMF publication in an interview posted on its website on Tuesday.

He had been asked whether a US recession was looming, but professed that he was 'cautiously optimistic'.

'Employment growth and wage increases have decelerated, but they both continue to grow. So long as US household income continues to expand, it's reasonable to expect consumption expenditures to increase,' he said.

A credit crunch spurred by the collapse of the US sub-prime mortgage market is expected to slow growth, and last month the IMF signalled it would cut its 2008 world economic growth forecast from the 4.8 per cent predicted in October.

Mr Lipsky did not indicate the scale on which the forecast would be revised. But he reiterated the challenges facing major economies like the United States, Europe and Japan, from tightening credit conditions and mounting energy prices.

'In particular, the US growth outlook, which we had perceived already as likely to be sub par in 2008, has become subject to somewhat greater risks,' he said.

'In Europe and Japan, growth appears to be decelerating after solid advances in the third quarter, and their outlooks would be affected if risks to US growth were to materialise,' Mr Lipsky added.

Emerging markets have been holding up so far but would be unlikely to weather a sustained downturn in the world's largest economies - tensions forcing up currencies like the euro, which Mr Lipsky said now looked overbought.

'Most recently, we find that the euro is by now somewhat on the strong side with regard to our views of medium-term equilibrium,' he said.

The Fund said Germany has staged a 'remarkable and enviable' economic recovery in recent years but faces slowing growth in 2008. It needs to press forward with reforms to improve productivity.

In conclusions from its Article IV consultation with Germany, the IMF said the country's gross domestic product growth will slow to 1.9 per cent in 2008 from 2.5 per cent in 2007, due largely to a slowing US economy.

'Growth will also be dampened, though to a more modest extent, by the stronger euro and higher oil prices,' the IMF said in a statement.

The IMF said the effect of a strong euro on Germany 'should remain modest' if global trade imbalances continue to unwind in an orderly way. But it said a disruptive unwinding of such balances that leads to sharply lower world growth would amplify the consequences of a strong euro.

The IMF said a pause or reversal in Germany's reform agenda could undermine some of its recent economic gains. Stepping up productivity is key to sustaining growth, particularly for services sectors that have absorbed unskilled workers, it added.

There is a shortage of skilled labour in the country as highly trained Germans seek employment abroad for lower tax rates, higher compensation or better opportunities. The IMF said to address this, Germany must focus on improving education and training and encouraging immigration of skilled workers. -- Reuters