Economic Growth To Remain Soft This Year: IMF Chief

Source : The Business Times, June 13, 2008

OSAKA - The world's major economies are likely to grow sluggishly for the rest of this year despite easing financial market turmoil, International Monetary Fund (IMF) head Dominique Strauss-Kahn said on Friday.

The IMF expects 'several quarters of soft growth' in developed countries with a proper recovery unlikely until 2009, he told a small group of reporters on the sidelines of a meeting of Group of Eight (G8) finance ministers here.

The United States was likely to start to see a rebound at the end of 2008 or in early 2009 with Europe following close behind, the IMF head said, predicting a U-shaped recovery rather than a V-shaped one.

Growth has slowed in most major economies in the wake of a slump in the US housing sector, which triggered turmoil on world financial markets last year and led to a credit crunch as banks became reluctant to lend to each another.

Some calm has returned to financial markets recently, although renewed jitters about the fallout from the sub-prime loan crisis emerged this week after Lehman Brothers announced it expected a big second-quarter loss.

'We have good reason to think that the financial crisis is mostly behind us but it's too soon to say' for sure, Mr Strauss-Kahn said.

He noted that problems in the US housing sector continued, which was increasing the risk of financial losses for banks.

G8 finance ministers are meeting in Japan to discuss threats to the global economy from soaring oil and food prices as well as the lingering fallout from the sub-prime loan crisis sparked by a wave of defaults on US mortgages.

'Inflation has become a serious problem again,' the IMF head said.

He said it was 'legitimate that central banks are giving all their attention' to rising prices.

US and eurozone central bankers have toughened their message on inflation recently, sparking speculation about possible interest rate rises to keep a lid on inflation.

Oil prices were climbing because global production capacity was getting close to its limit, requiring fresh investment to tap new resources, Mr Strauss-Kahn said.

He said the crude oil price spike was linked to the demand-supply balance as well as 'financial activity'. Fuel subsidies could help to ease the burden of high energy prices for some people in the short term but they were not the long-term answer.

'The real price of energy must be passed on to the end consumer,' he said. -- AFP