IMF Sees Significant, Prolonged US Slowdown

Source : The Business Times, 12 February 2008

(MUMBAI) The economic slowdown in the United States will be significant and will last for some time, the chief of the International Monetary Fund yesterday.

The slowing of the US economy has worried investors and policymakers and concerns have also surfaced that the US downturn is spreading to the 15-nation euro zone economy.

IMF managing director Dominique Strauss-Kahn told a conference in the country's financial capital that decoupling between emerging markets and developed economies was a 'misleading idea'.

'US slowdown will be both significant and will last for some time,' he said in a speech. 'Decoupling is a very strange idea, very misleading idea.

'The linkages between the financial and real sector, developed and emerging markets, are much more complex than they were before.'

Last month, the IMF cut its forecast for world growth this year in the face of continued stress in global credit markets, and warned that economic activity could slow even further.

It lowered its global 2008 growth projection to 4.1 per cent from 4.4 per cent, reflecting a marked slowdown from the 4.9 per cent pace achieved last year.

It has also cautioned that the main risk to the global outlook was ongoing turmoil in financial markets, which would further reduce domestic demand in advanced economies and create more significant spillovers into emerging markets and developing economies.

Mr Strauss-Kahn is on a three-day visit to India.

The Group of Seven has warned of further financial-market turmoil, which may lead to more rate cuts and tax reductions to prevent a slowdown of the global economy.

Finance ministers and central bankers ended a weekend meeting in Tokyo with a statement that 'downside risks persist', including the US housing slump and tighter credit conditions.

Without proposing specific remedies, the group pledged 'appropriate actions, individually and collectively'.

The US Congress has passed and sent to President George W Bush a US$168 billion stimulus package, seeking to end a housing slump that threatens to push the world's biggest economy into recession.

The US Federal Reserve reduced its key rate twice by a total of 1.25 percentage points in nine days through Jan 30.

The Bank of England also lowered its benchmark interest rate by a quarter-point to 5.25 per cent last week, as predicted by 59 of the 61 economists surveyed by Bloomberg News.

But Axel Weber said yesterday that the European Central Bank has not relaxed its view on inflation risks, suggesting he does not see an interest rate cut on the agenda.

Asked by the Frankfurter Allgemeine Zeitung (FAZ) whether the ECB was any closer to cutting interest rates in the euro zone, the ECB governing council member said: 'My view is different. It would be an exaggeration to say that we are facing a weakening in growth that by itself would slow inflation in such a way as to cause a rapid easing.

'Our primary mandate is price stability,' said Mr Weber, who is also head of the Bundesbank. 'There is no sign of a relaxation in the ECB council concerning price risks, quite the opposite.' - Reuters, Bloomberg