Global economy faces tough test, says IMF

THE global economy faces its most difficult test in many years with growth slowing sharply as high commodity prices put pressure on inflation, a senior International Monetary Fund official yesterday said.

John Lipsky, IMF first deputy managing director, said global growth was set to slow further in the second half of 2008, and continued financial sector strains were a major risk to the chances of recovery in 2009, on top of high oil prices.

Commodity prices remained high and volatile, bringing risks of knock-on inflation effects, but recent sharp falls in oil prices should lessen short-term inflation pressures in the developed world, he told a conference. Central banks in advanced economies could afford to keep interest rates on hold. In regions with high real rates, they could look out for easing price pressures which would allow them to loosen policy later, he said.

"Against the backdrop of protracted financial strains and dramatic surges in commodity prices, the global economy is confronted with its most difficult set of circumstances in many years," he said. "The good news is, we are only three to six months from the bottom, when the upturn begins."

Speaking at the same conference, European Economic and Monetary Affairs Commissioner Joaquin Almunia said the European Union needs to take urgent action to avoid a prolonged economic downturn and return to stronger growth.

Lipsky said the IMF was still reviewing its forecasts, which are due to be updated in its World Economic Outlook next month. But the fund saw global growth slowing from five per cent in 2007 to about three per cent late in 2008, reaccelerating towards four per cent in 2009.

The IMF's last forecasts in mid-July were for global growth of 4.1 per cent in 2008 and 3.9 per cent in 2009.

A G20 source told Reuters last month that these would be downgraded to 3.9 per cent this year and 3.7 per cent in 2009.

Lipsky said the 2009 pickup would be driven by an unwinding of the effects of the past 50 per cent increase in oil prices and a bottoming in the US housing sector.

In the US, the IMF expected growth of about one per cent in 2008 on a fourth-quarter-on-fourth-quarter basis, recovering gradually to about 1.5 per cent in 2009, Lipsky said. Reuters