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INTERNATIONAL MONETARY
FOUND
WORLD ECONOMIC OUTLOOK
SEPTEMBER 2006 – APRIL 2007
Global Economic Growth
2006 expanded vigorously (5.4%)
expected to moderate to 4.9% in 2007 and 2008
US: sharp downturn housing market
oil prices decline (August 2006)
Growth is expected to slowdown to 2.2%
(from 3.3% in 2006)
EU: fastest pace in six years
domestic demand
Growth is expected to slowdown:
tightening of Monetary and Fiscal policies.
JAPAN: activity regained traction end 2006
after a mid year patch
is expected a constant growth
LDC:
high commodities prices
supportive financial conditions
expected to grow strongly but a slower pace
Inflation
Strong growth and rising oil
prices (first half 2006) raised
concerns on inflation, but
pressures have moderated with
the decline of oil prices since
August.
Financial Markets
On background strong growth and reduced concerns on inflation:
positive trend despite Feb-Mar 2007 volatility crisis and concerns on US
subprime mortgage market
- equity markets close to all time highs
- real long-term bond yields remained below long-term standards
- risk spreads have narrowed
Exchange Rates
Dollar weakened mainly on Euro and Pound
Yen depreciated further (prospects low interest rates and capital outflows)
Renminbi declined modestly in real effective terms despite a mild
acceleration in its rate of appreciation on the dollar
Global Trade Imbalances
US current account deficit rose to 6.5% of GDP
although the non-oil trade deficit declined as a
percentage of GDP as exports accelerated
Surpluses in Japan, China, and the Middle
Eastern oil-exporting countries increased
further.
Monetary Policies
FED: interest rates on hold since June 2006
balance risk between cooling economy and concerns
on inflation
ECB: continued to remove monetary accommodation
rising interest rates to 4% by the summer would seem
warranted
Bank of Japan: raising interest rates gradually
since exiting its zero interest rate policy in July 2006
need more evidence of strength of expansion
Emerging market countries: in general
they tightened monetary policies
Fiscal policies
Advanced economies continued to strengthen their fiscal policies.
Germany, Japan, and the USA reduced substantially their budget deficits.
Fiscal gains largely reflected strong growth of tax revenues in cyclical upswing.
“Fiscal policies should be directed at achieving the necessary consolidation and
reform to maintain viability in the face of aging populations, while providing room
for automatic stabilizers to work as needed.”
Need to avoid erosion of revenue base.
With expansion firmly established now is time for structural reforms.
2006 – USA GDP
Growth slowed down 2.9 ( expectations 3.4) ,
slowdown in housing sector
2006 – USA Monetary Policy
Persisting inflation risk, not advisable to lower interest rates
2006 – USA Fiscal Policy
prospect of halving Federal deficit one year ahead of expectations
surplus money resulting from fiscal tightening policies should be
used for reforms in face of an aging population and rising health
care costs.
2007 – USA GDP
Growth slowed down markedly from expected 2.9% to 2.2%
housing sector crisis is slowly coming to an end
Mid-cycle crisis or start of recession?
Unemployment rate stable at 4.8%
Dollar depreciation will help exports and a rising GDP
2007 – USA Monetary Policy
Rising Interest rates halted in august 2006
Inflation: eased in early 2007 but inflationary risk is not yet over
2007 – USA Fiscal Policy
Federal Budget deficit slowed down (from -2.9% to -1.9%)
is expected a consolidation of Fiscal policy
Latin America
Growth decline
GDP decreasing everywhere except Brazil Chile
Inflation sustained – restrictive monetary policies
Risk
Left wing tendencies (Evo Morales, Chavez, Lula)
Public Debt
Need structural reforms
Oil Price
Venezuela Brazil (Petrobras)
bilateral treaties with foreign governments (USA)
Africa
constant growth
 non-fuel commodities

oil (Angola Sudan Nigeria)

gas (Algeria)
contained inflation and strong public debt

Foreign Direct Investments

Aid
Political Stabilization
Problem of Civil Wars

Policy-makers – income utilization (Ghana Nigeria)

Needed Marketed-oriented Reforms

Risks to the Growth Outlook
Potential for a sharper slowdown in the US housing
sector (key issue: decoupling from US)

Retrenchment from risky assets in financial markets

Risk that inflation pressures could revive as output
gap continue to close, particularly in an event of rising
oil prices

Low probability but high risk of a disorderly unwinding
of large global imbalances

2006 - 2007
Overall risks to the outlook seem less
threatening than six months ago but remained
weighted on the downside, with increasing
concerns about financial risks.
Multilateral Initiatives
Cooperative policy actions are necessary to support the smooth unwinding of
large global imbalances.
Raise savings in the US

Growth-enhancing reforms in Euro area and Japan

Exchange rate flexibility in some part of emerging Asia (especially China)

Revival of Doha round is welcomed since trade reforms are needed against the
risks of protectionism and for sustaining a gradual unwinding of global
imbalances.
Conclusion
Notwithstanding the recent bout of financial
volatility, the world economy still looks well set
for continued robust growth in 2007 and 2008.
While the US economy has slowed more than
was expected, spillovers have been limited.
Latin America and Africa need Structural
Reforms