Meltdown Fears Pass, But Worst May Not Be Over Yet: IMF

Source : The Business Times, April 22, 2008

Although the risk of a financial meltdown has passed, the worst of the US banking and economic crisis may not yet be over, as the crisis moves into new phases, according to a senior official from the International Monetary Fund.

In an interview with BT, Charles Collyns, the Fund's deputy director of research, pointed out that there are still downside risks arising from the interaction between the weak financial system and the weakening real economy. The US housing market could get weaker for at least another year, he said. In addition, unemployment is rising, as are the risks of corporate defaults. 'Those developments could put further pressure on the financial system,' he said.

Mr Collyns: Countries should avoid imposing export taxes and export bans on food items

In its latest World Economic Outlook released this month, the IMF forecasts that US GDP growth will slow to 0.5 per cent this year (from 2.2 per cent in 2007) and the economy 'could tip into mild recession' before recovering gradually in 2009. Under this scenario, the IMF estimates that total losses for the US financial system arising from the sub-prime crisis (but including losses in non-sub-prime related areas) would total US$945 billion. However Mr Collyns acknowledged that if the US recession were deeper and longer - as some economists predict - the losses 'could be substantially larger'.

The IMF forecasts that other advanced economies will also slow down this year, but by less than the US; it forecasts growth in both the Euro area and Japan at 1.4 per cent in 2008 (compared with 2.6 per cent and 2.1 per cent, respectively in 2007).

Global growth is predicted to come in at 3.7 per cent this year, compared with 4.9 per cent in 2007.

Mr Collyns pointed out that while emerging market economies will experience some slowdown in the wake of weaker growth in advanced countries, they will still grow above their average trend growth during the last ten years.

The IMF forecasts emerging economies will grow by 6.7 per cent this year, compared with 7.9 per cent in 2007.

Mr Collyns pointed out that these economies will be less adversely affected by the current crisis than by previous US recessions such as those in 2001 and 1991. 'Emerging markets are stronger now than they were ten years ago,' he said, pointing to stronger public sector balance sheets, large current account surpluses, substantial foreign exchange reserves and better macro policies, particularly in Asia - which also enjoys strong domestic demand growth. Developing Asia is projected to enjoy 8.2 per cent growth this year, compared with 9.7 per cent in 2007. Growth in Africa, Latin America and the Middle East is also expected to stay resilient, partly because of higher commodity prices.

Mr Collyns attributed the commodity price surge - which is fuelling higher inflation everywhere - mainly to a supply-demand imbalance. Strong demand, particularly from large emerging economies like China and India and the rising demand for biofuels, has not been accompanied by commensurate increases in supply. Food price inflation has been aggravated by the weakening of the US dollar and increased interest among investors in commodities as an asset class.

The Fund has called for urgent action to tackle rising food prices, including increased financing for poor countries - including via its own loan facilities - and higher funding for the United Nations' World Food Programme.

Mr Collyns also said countries should avoid imposing export taxes and export bans on food items. By keeping domestic prices artificially low, such measures inhibit much-needed increases in food production and prevent farmers from benefiting from higher food prices. Globally, they also exacerbate food shortages, as well as inflation.