US Credit Crunch May Test Global Economic Growth

Source: The Business Times, October 12, 2007

Broader slowdown cannot be ruled out after sub-prime fallout: IMF

(WASHINGTON) The recent global credit squeeze caused by the meltdown of risky US mortgage loans may test the ability of the world’s economy to keep expanding as it has over the past several years, the International Monetary Fund (IMF) said on Wednesday.

The IMF also said government policymakers would be confronted with new problems from the continuing process of globalisation and warned against overconfidence that economic stability would continue indefinitely.

In the analytical chapters of its World Economic Outlook released in advance of the Oct 17 publication of the forecast, the IMF said the durability of the global economic expansion is likely to persist.

‘Nevertheless, with financial markets around the world now being affected by the fallout from the US sub-prime mortgage difficulties, a broader economic slowdown cannot be ruled out,’ the IMF said.

Commenting on the released chapters, Simon Johnson, the IMF’s chief economist, said at a news conference that financial globalisation ‘is beginning to enter territory we have not seen before’.

He said the rapidity with which the credit crunch in the US spread to other countries demonstrates that ‘the interconnections between different kinds of financial institutions and between countries are becoming more complex and when sparks fly, they fly quite a long way and they jump over firebreaks’.

The IMF report is issued in advance of meetings of the Group of Seven major industrialised nations and the annual meetings of the IMF and its sister organisation, the World Bank, on Oct 20-22. The IMF warned against overstating prospects for future stability.

‘The process of globalisation continues to present policymakers with new challenges as reflected in the difficulties in managing volatile capital flows, increasing exposure of investors to developments in overseas financial markets and the uncertainties associated with large current account imbalances.’ The IMF said interest rates had returned to more neutral levels in most major advanced economies.

But the 185-nation lending organisation said, ‘The correction of asset prices in some countries and the current rise in risk premiums and tightening credit market conditions may also test the strength of the current expansion.’