IMF Global Slowdown Warning

The FT has an 'advanced peek' at the meat in the next IMF world outlook report:

IMF warns of ‘severe global slowdown’


The world is set to enjoy a fifth record year of high growth next year, says the International Monetary Fund, but it warns that the risks of a sharp slowdown have significantly increased.

The IMF will say next week that the world economy is on track to grow at 5.1 per cent this year but the risk of a severe global slowdown in 2007 is stronger than at any time since the 2001 terror attacks on the US.

“Risk to the global outlook is clearly tilted to the downside,” the IMF said, adding, “there is a one-in-six chance of growth falling below 3.25 per cent in 2007.”

The IMF warns slower growth could be triggered by a sharp US housing market slowdown or by surging inflationary expectations that forced central banks to raise interest rates.

“There is considerable uncertainty about whether the global economy will achieve a soft landing to a more sustainable pace of expansion or whether the world faces a period of sharply slower growth,” the Fund report says.

“Tight commodities markets are contributing to inflation concerns and the risk of a growth slowdown,” it warns. For that reason, “further [monetary] tightening cannot be ruled out” in the US, while “in the euro area, some further tightening will likely be needed to maintain price stability in the medium run”.

Actually I think the IMF is right to warn about the possibility of a slowdown next year. How severe it will be, and whether or not it will involve a recession in the US remains to be seen.

I seriously doubt that there is a major inflation problem in the eurozone itself, although there is, of course, an ongoing problem with undesireably high inflation in countries like Spain, Greece and Ireland. This problem has long existed, and is endemic to having a single common interest policy for all countries. So rather than the long term inflationary risk in the eurozone having risen spectacularly the ECB has obviously decided that enough is enough, and that it is time to pay attention to the needs of these high inflation economies, even if this is at the expense of countries like Germany and Italy, where the problem may be a looming slowdown.

The difficulty is that these two countries provide such an important part of the eurozone internal dynamic that the rebalancing which is in progress risks unhinging the nascent eurozone recovery even as it starts.

The problem posed by the US slowdown is real enough, but I am not convinced that the issue of inflation expectations in Europe (outside of the aforementioned high inflation countries and the ECB itself) is such a big deal. On the other hand the article doesn't mention the looming fiscal tightening scheduled in Germany and Italy for 2007, and I do think these will add even more momentum to any slowdown which does develop.

Definitely one more to watch.