Global Economy Faces Serious Threats

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Global Economy Faces `Serious Threats,' IMF's De Rato Says

Feb. 23 (Bloomberg) -- World economic growth, projected to reach about 4 percent this year, is being confronted with ``serious threats and challenges'' requiring urgent action from policymakers, Rodrigo de Rato, head of the International Monetary Fund, said.

The world economy is becoming too dependent on the U.S., the world's largest economy, and China to carry its momentum, he said. At the same time, both those nations are facing increasing pressures on their economies, stemming from record high budget and trade deficits in the U.S. and a fixed-exchange rate in China, he said.

``Looking ahead, last year's momentum should ensure that global growth remains robust in 2005,'' De Rato said in prepared remarks of a speech delivered to the New York Foreign Policy Association. ``However, within these positive signs lie serious threats and challenges,'' De Rato said.

Non-oil imports to the U.S. accounted for 18 percent of global trade, reflecting a lopsided dependence on the nation as a driver for world growth, De Rato said. Growth in Japan and Europe, which account for 25 percent of the global output, is ``underperforming,'' De Rato, said. A continuation of this trend would widen global trade imbalances, increasing the likelihood of sharps swing in currency markets and rising interest rates.

Deficit

One of the most pressing concerns, De Rato said, is the record-high U.S. current account deficit, which is the broadest measure of trade because it includes investment. Financing for the deficit, which comes largely from foreign private investors, may be in jeopardy as the U.S. dollar continues to depreciate, making investment less attractive, he said. The deficit reached a record $164.7 billion in the third quarter of 2004.

``There can be little doubt that the pattern of persistent and growing US current account deficits, and the increase in dollar indebtedness that they entail, have contributed to the recent renewed depreciation of the dollar,'' he said.

Since March 2002, the U.S. dollar has as fallen 50 percent against the euro in response to the growing current account deficit, De Rato said. So far, the decline has had little impact on the world economy, he said.

Criticism

``The greenback's fall should, at the very least, serve as a timely wake-up call for policymakers to take immediate action to tackle the problem of imbalances in the world economy,'' he said.

De Rato's criticism is among some of the sharpest from the Washington-based global economic watchdog since it stepped up efforts last year to voice concern about the threat posed by a constellation of conditions that economists describe as ``global imbalances.'' During a speech at Columbia University earlier today, he told nations that the time has come for them to take action to fix the ever-widening trade gaps.

``The IMF is expected to identify areas of imbalances in the international system and related policy implications,'' said Mohamed El-Erian, a former IMF official who now manages $20 billion in emerging market debts for Pacific Investment Management Co. in Newport Beach, California.

De Rato also provided a series of remedies to address the threats to the global economy. For the U.S., ``a convincing and sustained set of policies must be in place to narrow the imbalances, and to signal that any depreciation of the US dollar that might occur, on account of the deficit, will not be disruptive,'' he said. The U.S. must also follow through on pledges to cut its budget deficit.

Laws

European nations should work to reduce ``overly generous'' retirement plans and restrictive labor laws, he said. ``Above all, European policymakers and citizens must unite to remove unrealistic constraints on the freedom to work,'' he said.

De Rato also urged Japan to strengthen its banking system and reduce its corporate debt levels.

China and other Asian nations with fixed currencies should move toward greater exchange-rate flexibility, he said. China has come under pressure from the U.S. and Europe to loosen the yuan's decade-old peg to the dollar, which officials have said artificially depresses the currency's value and gives Chinese manufacturers an unfair trade advantage. The yuan has been pegged at about 8.3 to the dollar since 1995.

``Given today's inter-connected economy, the concerted effort of all parties, directed through a coherent set of policies, is what is needed,'' he said.



To contact the reporter on this story:
Julie Ziegler in Washington at jziegler@bloomberg.net

To contact the editor responsible for this story:
Joe Winski in Washington at jwinski@Bloomberg.net

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