MercoPress. South Atlantic News Agency

IMF yes/no policy: growth to continue but also credit turmoil

The International Monetary Fund's chief economist said on Wednesday repercussions from recent market turmoil should be contained within advanced economies, with growth in emerging markets likely to remain broadly on track.

"The immediate impact on global growth should be modest and, as I see it, the repercussions are likely to be contained within the advanced economies," chief economist Simon Johnson told a news conference, adding, "The global expansion should continue albeit at a somewhat slower pace". Speaking at the release of initial chapters of the IMFs bi-annual World Economic Outlook, Johnson said the recent turmoil in credit and money markets provided a major test for global financial stability. The turmoil also showed that traditional firebreaks, which would usually prevent financial problems from spreading, were less effective than in the past. "Recent turmoil in credit and money markets has provided a major test for global financial stability" but risks are not over yet. "Events remain fluid," Johnson said, adding that short-term risks had clearly risen. Johnson described the financial events of last August and September as "unexpected" because of their capacity to jump to other markets, from mortgage banks in the US to "Northern Rock in the UK". However he praised the sound economic policies applied in Latinamerica which have helped contain the spread of the crisis to the region but also called for fiscal restraint. The IMF chief economist said governments should prepare for turbulences and not wait for the danger signals, "when the hurricane arrives it's too late to buy insurance". However he did not reveal how developed countries could "minimize" the weaknesses exposed in the last two months. "We don't know yet if we need more or less regulation; it's still premature to decide". But Johnson did advise emerging countries: "fiscal control". Contrary to other crisis capital inflow to emerging countries has continued, even if considered risky, which means "there are no signals of an effective credit contraction". Nevertheless "past experiences have shown us that money comes in, then cools and begins rushing our", which means treasuries must be cautious about spending and never assume that funds will continue arriving indefinitively. Johnson praised the sound economic policies in emerging countries which have avoided contagion from the US and Europe problems but it does not mean that "sparks can still reach". "The world economy remains sound and commodity prices robust", which will help Latinamerica to continue with a "robust economic performance". One of the threats to emerging markets is inflation which is growing rapidly fueled by the price of farm commodities, pointed out Johnson who added that this has ceased to be a "great problem" in developed countries. "Food prices remain moderate and oil prices have not had such an impact in other products", said Johnson who forecasted that inflation will further cool as rich nations economies slow down. Leaked reports of the IMF upcoming growth forecasts show it has revised down 2008 projections for the United States economy to 1.9%, compared with 2.8% it expected for the U.S. in July. The Eurozone is down from 2.5% (in July) to 2.1%. It also slashed its forecast for world growth next year to 4.8% from a previous forecast of 5.2%.