'Trouble ahead' if US slump spreads
An economic slowdown in the United States would have only a modest global impact if contained to the US real estate sector, an International Monetary Fund report said yesterday.
The IMF report warned, however, that the shock to the global economy could be more significant if the downturn spreads to consumer spending and business investment.
The IMF made its comments in a portion of its semi-annual World Economic Outlook.
The report said any slowdown in the US economy "can exert spillovers" in both advanced and developing countries, especially to those with strong trade ties to the United States.
It noted that the impact on other economies may depend on how much of the slump extends beyond the US property markets.
"With the US slowdown to date largely driven by the cooling domestic housing market, spillovers to growth elsewhere have been limited," the IMF said.
"If the housing market downturn spread to consumption and business investment, however, then cross-border spillovers could be significantly larger, although still manageable, provided affected countries respond promptly and flexibly."
Moderate growth
Up to now, according to the US Federal Reserve, the world's largest economy remains on track for moderate growth in 2007 despite a severe slump in housing, although some data suggest a softening of business investment.
The Fed is predicting US gross domestic product growth in a range of 2.5 to 3 percent for 2007.
The IMF said that the global effect of a US downturn would be "most important for countries with close trade and financial ties with the United States, particularly Latin America and some industrialized countries".
It said a 1 percentage point reduction in annual US growth is associated with a loss of 0.2 of a percentage point in Latin America, and 0.4 of a percentage point or more in Mexico and Canada. But the impact would be "quite small" for Africa and the Middle East.
"Spillovers are larger during full-blown US recessions than during mid-cycle slowdowns," the report said.
"In part, this arises because US import growth turns sharply negative during recessions, and cross-country asset price correlations increase significantly during financial market downturns."
Some of the impact may be mitigated by "forward-looking" monetary policy actions and flexible exchange rates, the IMF said.
"If the US slowdown continues to be largely driven by the cooling domestic housing market, spillovers to growth elsewhere should remain limited, particularly with activity in Europe strengthening," the IMF said.
'Cross-border spillover'
"Nevertheless, if the housing market downturn spreads to consumption and business investment, then larger cross-border spillovers could be expected. In that case, policymakers would need to respond in a flexible, forward-looking and timely fashion to help cushion the impact of weaker external demand."
The IMF report said separately that some of the global economic imbalances may be corrected as the dollar's value declines. The massive US trade gap, standing at $763.6 billion in 2006, is among key concerns as surpluses and currency reserves mount.
"A real US dollar depreciation of less than 10 percent could bring about a one percent of GDP narrowing in the US trade deficit."
In another section, the report said the "effective global labor force" has risen fourfold over the past two decades, reflecting population growth and the increasing integration of China, India, and the former Eastern bloc.
"The integration of workers from emerging market and developing countries into the global labor force has produced important benefits for advanced economies," said the report.
AFP
(China Daily 04/06/2007 page16)
