IMF sees global economy growing faster

SINGAPORE: The International Monetary Fund (IMF) has raised its forecast for global economic growth while warning that inflation, oil prices and the US housing slowdown threaten the strongest expansion in three decades.

The world’s economy will expand 5.1% this year and 4.9% in ’07, the fund, established to aid countries in financial crisis, said on Thursday in Singapore. Both forecasts are 0.2 percentage point higher than the April predictions. Growth was 4.9% in ’05.

Rising borrowing costs pose a risk to growth as central banks seek to quell inflation, the fund said. The US, Europe and Asia have raised interest rates as higher energy costs and falling unemployment prompted companies to raise prices. This year caps the strongest four-year period of global expansion since the early 1970s, IMF said. “The strong central forecast is surrounded by more risk than usual,” IMF chief economist Raghuram Rajan said at the release of the semi-annual report.

Central bankers need to be wary of raising rates too much as they tackle inflation, he said. The increase in the forecasts reflects faster-than-anticipated growth in China, India, the 12-member euro area, the UK and Russia.

The fund calculates there is a one-in-six chance that world growth will fall to 3.25% or less next year. “The biggest risk is a global hard landing,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, Australia’s second-largest money manager. “For next year, you would be revising down global growth forecasts because the US does seem to have turned the corner.”

The Washington-based institution forecast the pace of inflation in ’06 would be 2.6% in “advanced” economies including the US, Japan and the dozen nation euro area. That would be the highest since 1994. Inflation will slow to 2.3% in ’07, IMF said in its World Economic Outlook.

“Inflation is a risk worldwide and central banks will have to combat that with higher interest rates, which will slow global growth over the next couple of years,” said Pu Yonghao, head of Asian research at UBS AG in Hong Kong. “The growth forecast for ’06 is feasible.”

Crude oil prices will remain high amid supply constraints and unrest in the Middle East and Nigeria, the group forecast. IMF raised its estimate for an annual average of UK Brent, Dubai, and West Texas Intermediate crude oil spot prices by almost 15% to $69.20 a barrel this year.

The price will climb to $75.50 a barrel next year, up from the $60.75 forecast in April. IMF also included lopsided flows of trade and investment in its list of risks. A reversal of such flows, which are reflected in the record US trade deficit and surpluses in Asia, would “impose heavy costs” on the world economy. “Globalisation is creating new types of volatility, which IMF needs to try to understand,” Thailand’s FM Thanong Bidaya said in a September 12 interview. He said the lender must ensure fluctuations in financial markets don’t undermine global economic growth.

The US expansion will cool as the slowdown in housing curbs consumer spending in the world’s largest economy. The fund cut its ’07 growth forecast to 2.9% from 3.3%. That would be the weakest since ’03. The US current-account deficit is forecast to widen to 6.9% of gross domestic product next year. Reducing that gap will require further depreciation of the dollar, which is now around its average level of the past quarter-century, the fund said.