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IMF Says Economic Risks Are `Slanted to the Downside'

IMF Says Economic Risks Are `Slanted to the Downside'
22 September 2005 (CHINA KNOWLEDGE PRESS)

Sept. 22, 2005 (Bloomberg) - The risks to world economic growth are ``slanted to the downside'' with record oil prices posing a particular threat, the International Monetary Fund said today.

Global gross domestic product will rise 4.3 percent this year and next, the Washington-based lender said in its semi-annual World Economic Outlook. The 2006 projection is 0.1-percentage point lower than what the IMF anticipated in April and compares to a 5.1 percent expansion in 2004, the best in three decades.

Higher energy costs, increased national protectionism and a tightening of financial market conditions each endanger economic expansion, the IMF said in its 293-page report. It cut its growth predictions for the U.S., the 12-nation euro area and the U.K., while boosting forecasts for Japan, China and Canada.

``The downside risks to our forecast have increased,'' IMF Chief Economist Raghuram Rajan told reporters in Washington today. ``High oil prices are a clear and present danger.''

The IMF said another ``substantial jump'' in prices couldn't be ruled out and warned that such a jump could fan inflation and hurt consumer confidence. The lender increased its forecast for oil prices -- an annual average of U.K. Brent, Dubai, and West Texas Intermediate spot prices -- to $54.23 for 2005 and $61.75 in 2006 from its previous estimates of $46.50 and $43.75.

``Recent levels of consumption are likely to be more persistent and will continue to tax available spare capacity,'' the IMF said before noting that the world economy is still more resilient to higher oil prices than it was in previous decades.

The IMF said Hurricane Katrina, which struck the U.S. Gulf Coast late last month, may be having indirect effects on world oil consumption, and would cause temporarily higher prices.

Other Risks

Today's report was released as representatives of the IMF's 184 member nations gather in Washington for their annual meeting on Sept. 24 and 25. Finance ministers from the Group of Seven nations - the U.S., Japan, Germany, the U.K., France, Canada and Italy -- also convene in Washington on Sept. 23.

In addition to oil, other potential detriments to growth that are likely to be addressed include what the IMF says are recent proposals to erect trade barriers in the U.S. and Europe, ``richly valued'' housing markets that could weaken, and the potential for global financial market conditions to ``tighten significantly.''

Consumer prices in advanced economies will rise a projected 2.2 percent this year and 2 percent in 2006, both 0.2 percentage point higher than the April forecast, the IMF said. While more expensive oil has pushed up consumer prices, outside of energy costs, inflation remains ``generally contained'' and expectations for it are ``well anchored,'' it said.

U.S. Economy

The U.S. economy, the world's largest, will remain the engine of global growth, expanding 3.5 percent and 3.3 percent in 2005 and 2006 respectively, the IMF said. Still, those numbers are down 0.1 and 0.3 percentage points from forecasts made five months ago.

Productivity advances will underpin economic activity, although higher gasoline prices and record low household savings increase the risk of a ``sharp slowing'' in private consumption, the IMF said. This is especially plausible if an ``increasingly richly valued'' housing market weakens, it said. Hurricane Katrina will have only a ``moderate'' effect on growth, it said.

The Federal Reserve's policy of raising interest rates in a measured pace ``appears appropriate,'' it said. The Fed yesterday increased its benchmark interest rate for the 11th straight time to 3.75 percent.

Europe, Japan, Canada

The IMF lowered its projection for expansion in the euro-area this year for the second time in two months, cutting it to 1.2 percent from 1.3 percent. It forecast 1.8 percent growth in 2006, 0.5 percentage points lower than its April estimate.

The revised outlook reflected increased pessimism about the economies of Germany, France and Italy -- the region's three largest -- amid disappointing consumer and corporate spending, the IMF said. If inflation pressures remain limited, the euro surges or the recovery fails to materialize, the European Central Bank should consider cutting its benchmark interest rate from the six decade low of 2 percent it has sat at since June 2003, it said.

``Excessive monetary tightness appears a greater risk than excessive monetary ease,'' the fund said.

A rebound in domestic demand meant the 2005 growth forecast for Japan, the world's second largest economy, was increased by 1.2 percentage points to 2 percent, a rate the IMF expected to be maintained next year. That didn't stop it from recommending that the Bank of Japan maintain its current level of interest rates until deflation is ``decisively beaten.''

The U.K. economy will grow less than the IMF expected in April, accelerating 2 percent this year and 2.3 percent in 2006. The pace of recovery will determine whether the Bank of England has to cut interest rates again after doing so for the first time in more than two years in August, the IMF said.

Canada's economy will expand 2.9 percent in 2005 and 3.3 percent in 2006 amid strong consumption.

China, India

China's economy will grow 9 percent this year before slowing to 8.2 percent in 2006, the IMF said as it raised its estimates for both years. The world's largest developing economy should gradually move to even ``greater exchange rate flexibility'' after June's decision to allow the yuan to rise 2.1 percent from its previously fixed rate of 8.3 to the dollar, it said.

India's economy will grow 7.1 percent this year and 6.3 percent in 2006, the fund said. Middle Eastern countries such as Saudi Arabia and Iran have profited from high oil prices, and growth in the region is set to be 5.4 percent this year and 5 percent in 2006. Russia, also a major oil producer, will grow 5.5 percent in 2005 before fading to 5.3 percent next year.

Brazil and Mexico

Growth in Mexico and Brazil, Latin America's largest economies, will slow more than initially expected this year as weaker U.S. manufacturing and higher interest rates curb demand.

Brazil, the largest economy in South America, will see growth of 3.3 percent in 2005 and 3.5 percent in 2006. The IMF reduced its forecast for Mexico's economic growth to 3 percent this year after a 4.4 percent expansion in 2004, the fastest since 2000. In April, the IMF had estimated Mexico's GDP would grow 3.8 percent this year and Brazil's would expand 3.7 percent.

Argentina, which contracted as much as 11 percent in one year during its economic crisis, will enjoy growth of 7.5 percent in 2005, before a slowdown to 4.2 percent in 2006, the IMF said.

Continuing Strength

Financial market conditions remain ``benign'' with corporate profits allowing stock prices to remain ``resilient,'' the IMF said. Market interest rates are still ``unusually low,'' it said. Fiscal and monetary policies will stay ``accommodative,'' it said.

The IMF reiterated warnings that the future strength of the world economy depended on the ability of the U.S. to narrow its trade and budget gaps, and on Europe and Japan to bolster output. The U.S. current account deficit is now above 6 percent of the nation's economy.

``Global current account imbalances -- a key medium-term risk to the outlook -- have increased yet again,'' the IMF said. Without taking action, governments run the risk of triggering a global recession if investors grow wary of buying U.S. assets.

Two years since the Group of Seven industrialized nations concluded a meeting in Dubai with a pledge to make the world economy ``less unbalanced,'' the IMF said today ``there remains a considerable way to go,'' with the risk of a global recession if action isn't taken.

Following are the IMF growth forecasts for select countries. *

 
  
                                Actual         Estimates 
  
                        
  
             2003   2004    2005   2006 
  
   
  
      World                4.0    5.1     4.3    4.3 
  
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      Brazil                 0.5    4.9     3.3    3.5 
  
      Canada             2.0    2.9     2.9    3.2 
  
      China                 9.5    9.5     9.0    8.2 
  
      France               0.9    2.0     1.5    1.8 
  
      Germany           -0.2    1.6     0.8    1.2 
  
      India                   7.4    7.3     7.1    6.3 
  
      Japan                 1.4    2.7     2.0    2.0 
  
      Mexico               1.4    4.4     3.0    3.5 
  
      Spain                  2.9    3.1     3.2    3.0 
  
      U.K.                    2.5    3.2     1.9    2.2 
  
      U.S.                    2.7    4.2     3.5    3.3 
  
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