Market, oil turmoil may dampen growth further

WASHINGTON – The International Monetary Fund on Thursday warned that persistent turmoil in financial markets and higher oil prices had cast a darker cloud over global growth prospects for next year.

Less than two months since its last health check on the world economy, the IMF is now likely to revise down its global growth estimate of 4,8 per cent for next year, as risks identified in October had now materialised, IMF spokesman Masood Ahmed said. “We do think that recent turbulence in both oil and financial markets have further dampened the global outlook,” Ahmed told a regular briefing for reporters.”Some of the downside risks that we had identified (in October) have materialised,” he said, adding: “We do see now the downside risks as being greater to the baseline scenario than we had and we will be likely shaving down that baseline scenario at the end of the year.”Ahmed said strong third-quarter economic activity in several advanced and emerging economies meant global growth for 2007 could exceed the IMF’s October estimate of 5,2 per cent.Still, he said higher global oil prices had an impact on consumers and in the United States had shown it was directly affecting inflation.”The combination of rising food and fuel costs are exerting pressures on household budgets,” Ahmed said, “and also means that central banks may find less room for maneuver in responding to weakening demand caused by the financial turbulence, given concerns that higher fuel costs could have second-round effects on inflation,” Ahmed said.He did not offer any new figures, saying those would be released in January in an update of the fund’s bi-annual World Economic Outlook, which will be released in full in the spring.MARKETS UNDER STRESS Since October, Ahmed said credit and money markets were still under stress and estimates of bank losses had risen.The IMF’s warning comes as the fallout of problems in the US sub-prime mortgage market appears to be deepening as banks in the United States and Europe have announced billions of dollars in mortgage-related losses while equities have fallen around the world.”There are also concerns of wider spillover effects across markets,” Ahmed said.He warned that the outlook could also change for emerging market economies, which have been broadly unaffected by the turmoil that emerged out of the United States and spread into European markets.Ahmed said tightening global credit conditions could present problems for emerging economies down the road, especially in countries where rapid credit growth was financed by large-scale foreign bank loans.He said the US Federal Reserve’s interest rate cuts had been well timed so far and should support US growth.”In view of the financial market strains and the downside macroeconomic risks to growth and moderate core inflation readings for the past month, the Fed’s accumulative 75 basis point easing has so far been well timed and we think should support growth while maintaining low inflation,” he said.He noted that unemployment in the United States was still low and corporate balance sheets strong.”So our view now is that we still see a period of below-potential growth as the most likely scenario for the US economy,” he added.In the euro area, Ahmed said the economy was still doing well although growth should moderate in 2008, as expected, due to the market turmoil.Nampa-Reuters”We do think that recent turbulence in both oil and financial markets have further dampened the global outlook,” Ahmed told a regular briefing for reporters.”Some of the downside risks that we had identified (in October) have materialised,” he said, adding: “We do see now the downside risks as being greater to the baseline scenario than we had and we will be likely shaving down that baseline scenario at the end of the year.”Ahmed said strong third-quarter economic activity in several advanced and emerging economies meant global growth for 2007 could exceed the IMF’s October estimate of 5,2 per cent.Still, he said higher global oil prices had an impact on consumers and in the United States had shown it was directly affecting inflation.”The combination of rising food and fuel costs are exerting pressures on household budgets,” Ahmed said, “and also means that central banks may find less room for maneuver in responding to weakening demand caused by the financial turbulence, given concerns that higher fuel costs could have second-round effects on inflation,” Ahmed said.He did not offer any new figures, saying those would be released in January in an update of the fund’s bi-annual World Economic Outlook, which will be released in full in the spring.MARKETS UNDER STRESS Since October, Ahmed said credit and money markets were still under stress and estimates of bank losses had risen.The IMF’s warning comes as the fallout of problems in the US sub-prime mortgage market appears to be deepening as banks in the United States and Europe have announced billions of dollars in mortgage-related losses while equities have fallen around the world.”There are also concerns of wider spillover effects across markets,” Ahmed said.He warned that the outlook could also change for emerging market economies, which have been broadly unaffected by the turmoil that emerged out of the United States and spread into European markets.Ahmed said tightening global credit conditions could present problems for emerging economies down the road, especially in countries where rapid credit growth was financed by large-scale foreign bank loans.He said the US Federal Reserve’s interest rate cuts had been well timed so far and should support US growth.”In view of the financial market strains and the downside macroeconomic risks to growth and moderate core inflation readings for the past month, the Fed’s accumulative 75 basis point easing has so far been well timed and we think should support growth while maintaining low inflation,” he said.He noted that unemployment in the United States was still low and corporate balance sheets strong.”So our view now is that we still see a period of below-potential growth as the most likely scenario for the US economy,” he added.In the euro area, Ahmed said the economy was still doing well although growth should moderate in 2008, as expected, due to the market turmoil.Nampa-Reuters