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World economy resilient but inflation threat looms: IMF
By Daniel Rook
AFP
SINGAPORE
Petroleumworld.com 09 15 06
The world economy is headed for its strongest expansion for three decades but simmering inflation, sky-high oil prices and rising interest rates pose growing dangers, the IMF said Thursday.
A dollar slump is also a risk if global economic imbalances, namely the huge US current account deficit and large Asian surpluses, fail to unwind smoothly, the International Monetary Fund said in its World Economic Outlook.
The US economy is expected to cool next year but recoveries in Japan and the eurozone will continue, while China shows no signs of slowing its recent breakneck pace, the IMF said in the twice-yearly report.
The world economy is expected to enjoy robust growth of 5.1 percent this year, with momentum slowing slightly to 4.9 percent in 2007, the IMF said, raising its forecasts for both years by about a quarter point.
Those forecasts would mark the strongest four-year expansion since the early 1970s, after growth of 4.9 percent in 2005 and 5.3 percent in 2004, said the IMF, which holds its annual meeting in Singapore next week.
"This is the fourth year of very strong global growth which has been maintained in the face of headwinds such as strong commodity prices," said IMF chief economist Raghuram Rajan.
"This strong central forecast is surrounded by more uncertainty than usual with risks tilted to the downside," including possible further interest rate rises by the US Federal Reserve, he told a press conference.
"It is clear that even as the (US) economy slows, inflationary pressures are rising. If these become entrenched in expectations the Fed will have to raise interest rates even higher and for longer," Rajan said.
"So the Fed may soon be on the horns of a dilemma and monetary policy will need to be skillfully managed if the economy is not to be gored."
US core inflation hit 3.5 percent over May-July, the fastest pace since mid-1995, fanning worries of further interest rate rises by the Fed, which last month paused in its monetary tightening campaign after 17 consecutive hikes.
For now, however, the outlook remains bright, with China booming, Japan winning its long fight with deflation and the eurozone set to sustain its recovery, helping to offset a softer US performance, the IMF said.
US economic growth is expected to slow from 3.4 percent this year to 2.9 percent next year as the housing market cools.
"The forecast housing slowdown is well and truly here with house price appreciation close to zero," Rajan said.
"Rising inventories of unsold houses suggest things will get worse before they get better, though rapidly slowing housing construction suggests that the supply side is also responding appropriately," he said.
A eurozone recovery is gaining traction with growth of 2.4 percent expected this year, easing to 2.0 percent in 2007, partly due to German tax hikes.
The British economy should expand 2.7 percent this year and next.
Emerging Asia continues to enjoy growth in excess of eight percent a year, powered by the sizzling Chinese and Indian economies.
China is projected to grow 10 percent this year while a moderate deceleration is seen in India from 8.3 percent in 2006 to 7.3 percent in 2007, with a chance of even faster growth in both countries, the report said.
"Even as the US economy is beginning to slow, the euro area has gained momentum, Japan's expansion continues, and emerging markets and developing countries are delivering very impressive growth rates," said Rajan.
The IMF renewed its call on China to allow a "more substantial" appreciation of the yuan to help ease global economic imbalances.
"Ultimately in the market economy that China is rapidly becoming, administrative methods to curb investment are only temporary fixes, akin to using band-aids to staunch a gaping wound," said Rajan.
The IMF and World Bank meetings look set to be overshadowed by a growing row pitting the Singapore authorities against the two groups over the island state's decision to block certain activists from attending.
World Bank President Paul Wolfowitz on Thursday publicly accused Singapore of reneging on an earlier agreement to admit the activists who have been invited by the institutions as part of their efforts to engage with critics.
AFP 14 0618 GMT 09 06
Copyright ©2006 AFP. All Rights Reserved.
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