MercoPress. South Atlantic News Agency

Increased risks of global slowdown warns IMF

The International Monetary Fund warned Tuesday that the risks of a global slowdown have increased due to higher interest rates, surging oil prices and an apparent cooling in the US housing market that could slow the US economy.

While the IMF said its general outlook on the global economy remains positive, "there are risks to the global economic outlook that have tilted to the downside," according to its semiannual Global Financial Stability Report.

Should global growth falter, the IMF said international financial markets could undergo a more severe correction than the one they experienced in May and June, when emerging markets in particular were hit hard.

"The recent market turbulence is a timely reminder for authorities to strengthen macro-economic policies and persevere with needed structural reforms," said the report, released a week before the IMF-World Bank hold their September 19-20 annual meeting in Singapore.

In its latest assessment of the global financial system, the IMF also warned that the risk of a disorderly decline in the US dollar could increase unless policies are put in place to address global saving and investment imbalances.

"The potential for a disorderly unwinding of global imbalances remains a concern," the IMF said adding that emerging Asian countries should be more ambitious in increasing exchange-rate flexibility, the US should consolidate its fiscal position and Europe and Japan should speed up structural changes.

It said that rising oil prices coupled with recent figures showing that the sale of US new homes fell by 4.3% in July - the biggest fall since February - have sparked fears of a wider economic downturn.

Ahead of the IMF and World Bank's annual meeting, Group of Seven finance ministers and central bankers plan to meet on Saturday in Singapore, where they are expected to discuss exchange rates.

Market consensus is for Asian currencies to appreciate over the medium-term while non-Asian currencies are expected to weaken, and the dollar is expected to remain relatively stable, the IMF said.

It noted that foreign holdings of US assets continue to grow, rising to 6.3 trillion by June 2005 from 1.2 trillion in 1994.

The report also said that demand for US assets will increasingly depend on Asian central banks, which currently hold more than half the world's foreign currency reserves, and oil-producing nations, which have amassed substantial reserves in the last two years or so.

"There may be some shift in demand away from the highly liquid, short-duration, fixed-income assets typically held in official reserves portfolios," which could result in a disorderly decline in the US dollar unless policy-makers take appropriate action, it said.

The report gave a general indication of the IMF's outlook on the global economy two days before it releases the second part of its closely watched World Economic Outlook, which includes specific economic forecasts for the world economy and regional economies.

Despite its warnings, the IMF said it sees "a continuation of favourable developments, in both growth and inflation. Under this scenario, corporate earnings growth would remain healthy and default rates low." The volatility in financial markets in May and June sparked by worries about higher global interest rates was "modest" and "not a harbinger of a protracted downturn," it said.

Global markets have performed strongly in recent years, resilient to several market corrections, it said.

"Corporate fundamentals are also still solid" said the IMF said. "Most companies are still expecting respectable growth in earnings over the next year or so, even after very strong growth in recent years." However, risks remain, including inflationary pressures, particularly given soaring oil prices. It also said a rapid cooling-off in the US housing market could lead to a pronounced slowdown of the US economy.

"International financial markets could undergo more severe corrections, especially because markets appear to be pricing in the baseline growth scenario with little provision for risk".