IMF: World economy faces greater risks

Updated: 2007-12-13 16:37

The greatest threat to the world economy is the financial market unrest stemming from the high-risk US subprime mortgage sector, where loans were given to home buyers with poor credit histories. Large numbers of banks and lenders have been affected, and world credit has become volatile.

The world's leading economy, the United States, has been heavily hit by the subprime mortgage crisis. The IMF readjusted the prediction of US economic growth of this year and next year to 1.9 percent, 1 percent lower than last year's 2.9 percent, and 0.9 percent lower than its original prediction of the US performance in 2008.

In countries like Canada, European Union countries and Japan, where the knock-on effect from the US is likely to be largest, and in countries where the impact of continuing financial market turmoil is likely to be more acute, the economic slowdown is inevitable in the coming year, the report warned.

"Risks to the outlook lie firmly on the downside, centering around the concern that financial market strains could continue and trigger a more pronounced global slowdown," the IMF said.

"Thus, the immediate task for policy-makers is to restore more normal financial market conditions and safeguard the continued expansion of activity."

Besides the financial problem, some other phenomena appear to be more surprising and alarming, including high oil prices and sharp food price increases in emerging markets and developing countries, which would stimulate inflation.

Other risks include the impact on emerging markets of strong capital inflow, and continued large global imbalances. At the same time, longer-term issues such as population aging, increasing resistance to globalization, and global warming are also a source of concern, the IMF pointed out.

Looking back and ahead, people should have reason to be confident in the global economy, yet should remain vigilant. Along with globalization, the global economy is intertwined with opportunities and risks.

The key in the years ahead, the IMF suggested, is to make sure that emerging markets and developing countries can continue to grow rapidly and without major disruptions. Trade liberalization should be continued, to allow capital to flow to more productive opportunities in poorer countries. Most importantly, the benefits of growth should be widely shared across all countries and by as many people as possible within countries.

To tackle shocks such as the US mortgage crisis and the world financial turbulence of this year, the IMF will work with economic departments of various countries to anticipate further serious shocks, both negative and positive, and to work harder to make sure that the policies and institutions in place can withstand these shocks, the IMF said.

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