MercoPress. South Atlantic News Agency

IMF: oil prices have worsened global imbalances

Record high oil prices have greatly worsened global economic imbalances increasing the danger of turbulences through a “sudden, disorderly adjustment”, warned the International Monetary Fund in an advance of its World Economic Outlook.

However globalization has helped keep down inflation in advanced economies while restraining wage growth in producing countries. As a result of these trends, consumer spending mainly in the US has continued unabated and boosted the current account deficit even more in the world's largest economy, the IMF said.

Rising oil prices have not boosted inflation rates as had been expected, a phenomenon noted often by US and other economists over the past year. The IMF said that 'improved monetary frameworks' and 'deeper global financial integration' have helped counterbalance the effect of soaring oil prices.

Another reason for restrained inflation is that oil-producing countries have been more 'circumspect about spending' and are holding current account surpluses 'often exceeding 15% of gross domestic product,' the IMF said.

At the same time, excess oil earnings are being recycled through international capital markets - keeping interest rates low in the US, depressing yields on government bonds by 'perhaps' three-quarters of a percentage point and 'fuelling the current account deficit' by encouraging consumption.

'High oil prices are widening the already large global external imbalances,' the report said. 'The higher oil price accounts directly for one-half ... of the deterioration in the US current account over the past two years' - an amount equivalent to about one percentage point of US GDP, the World Economic Outlook summary said.

With limited excess production capacity, the analysis concludes that the balance between supply and demand for oil over the medium term was likely to remain "very tight and oil prices will persist near current levels".

Global competition has kept down import prices in advanced economies, reducing inflation by an average of one-quarter of a percentage point a year on average. In the US, the effect has been even more pronounced, with a one-half per cent reduction in inflation.

'Robust global growth and increased trade openness has reduced relative producer prices in manufacturing by about 0.3% a year over the past 15 years,' the report said. Producers of textiles - where quotas ended earlier this year, opening markets to a flood of cheaper Chinese goods - and electronics are particularly affected, the IMF said.

The IMF noted that corporations have been on a savings binge - a global 'savings glut,' according to US Federal Reserve chairman Ben Bernanke. During 2003 to 2004, the last period for which figures are available, corporations in the G7 group of most industrialized nations accumulated 1.3 trillion dollars of financial assets - more than twice the size of current account surpluses of emerging and developing economies during that time.

But it said such a phenomenon was cyclical, and reflected high profitability and at the same time increased uncertainty about the future.

'Rather than investing in physical capital at home, companies have pursued strategies of expansion that involved acquiring existing or new fixed assets abroad,' the IMF said.

Uncertainty over pension liabilities that have gone unfunded by many companies in the US and elsewhere could also be prompting companies to hold cash, the IMF said.