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IMF says world economy to stay strong
Wed Sep 21, 2005 09:06 AM ET

"The fund said global inflation had picked up slightly on the higher oil prices, but remained at moderate levels."


By Lesley Wroughton
WASHINGTON (Reuters) - The world economy is set to grow a swift 4.3 percent this year and next -- above the 3.9 percent average of the past decade -- despite higher oil prices and a battering from Hurricane Katrina, the IMF said on Wednesday.

In its twice-annual World Economic Outlook, the International Monetary Fund downgraded its forecast for global growth in 2006 from the 4.4 percent expected in April but retained this year's projection.

"The world economy has proved tremendously resilient over the last few years," IMF chief economist Raghuram Rajan said.

"Disease, natural disasters and soaring oil prices have only caused minor blips in an overall picture of healthy growth," he added.

Still, it warned that risks were rising, fueled by widening world current account imbalances, growth distortions across regions and lingering concerns about limited crude production capacity that kept oil prices high.

Crude oil prices hit record levels above $70 a barrel last month, more than double the levels at the start of last year.

The fund said global inflation had picked up slightly on the higher oil prices, but remained at moderate levels.

Core inflation in industrialized nations appeared generally contained, the fund said, adding that price expectations were well-anchored, although the impact from higher oil prices would bear careful monitoring.

The IMF said financial market conditions remained benign, amid low borrowing costs, high equity prices and strong corporate balance sheets.

Emerging markets' financing conditions were favorable, it said, reflecting strong economic fundamentals and an increased presence of long-term investors and search for yields.

The IMF trimmed its 2005 forecast for the world's largest economy, the United States, to 3.5 percent from the 3.6 percent it envisioned in April, and reduced its forecast for 2006 to 3.3 percent from 3.6 percent.

It said the direct toll on U.S. growth from Hurricane Katrina would be moderate and wouldn't weigh long on growth.

UNAMBITIOUS PLAN

But the IMF was critical of Washington's "unambitious" plan to cut the U.S. budget gap in half by the time President George W. Bush leaves office in early 2009.

The U.S. budget deficit hit a record $412 billion last year. While recent tax receipt data suggests the shortfall has been narrowing, the potential cost of cleaning up Katrina's devastation -- which some lawmakers say could hit $200 billion -- has led analysts to raise their deficit forecasts.

Japan's economy looked poised for a good recovery with the IMF forecasting growth more than a percentage point faster in 2005 than forecast five months ago. However, it urged the Bank of Japan to retain its zero interest rate policy for now.

The fund forecast Japanese gross domestic product would grow 2 percent this year and next. In April, it had projected growth of just 0.8 percent.

The global lender said its outlook for the euro zone remained somber, blaming weak domestic demand, a lack of structural reform and rising fiscal deficits.

It said growth will be lower than expected next year and the European Central Bank should be ready to cut interest rates if the economy falters again.

It also cautioned China that it may need to tighten monetary policy if investment growth intensifies and fears are reignited about economic overheating.

The fund said 2005 Chinese growth was now poised to reach 9 percent, up from 8.5 percent predicted in April. In 2006, Chinese growth was likely to reach 8.2 percent, up from the IMF's April outlook of 8 percent.

In Africa, the economic expansion continues to be underpinned by strong global demand, structural reform, better domestic macroeconomic policies and fewer wars, the fund said, but added that growth would slow to 4.8 percent this year from 5.4 percent in 2004.

© Reuters 2005. All Rights Reserved.

http://yahoo.reuters.com/newsArticle.jhtml?type=businessNews&storyID=9715706