IMF plays down effect of US slowdown
By Krishna Guha in Washington
Copyright The Financial Times Limited 2007
Published: April 5 2007 02:24 | Last updated: April 5 2007 02:24
The US slowdown should not drag down the economies of the rest of the world as long as the US economy does not succumb to full-blown recession, the International Monetary Fund says on Thursday.
In its latest World Economic Outlook, the IMF said the factors currently slowing the US economy – “primarily housing and manufacturing” – are so specific to the US that they have had a “limited global impact”.
“Most countries should be in a position to decouple from the US economy and sustain strong growth if the US slowdown remains as moderate as expected,” the report says
Yet the IMF warns that the US is still by far the most important economy in the world and says if it did slide into recession the impact on the rest of the world would be serious.
“The influence of the US economy on other economies does not appear to have diminished,” the IMF notes. “On the contrary, indications are that the magnitude of spillovers have increased over time”, particularly with respect to other countries in the Americas.
This is because most countries are more open to trade than in the past, so even if the share of their exports going to the US has declined, the share of their total output sold to the US has gone up not down. Moreover, financial linkages have become more important for growth over time, with greater financial integration between national markets.
The IMF says US financial markets play an important signalling role globally and spillovers from these markets are particularly important “during periods of market stress.”
But the IMF says the effect of economic developments that are specific to the US should not be exaggerated. Past sharp declines in global growth were largely caused by “common disturbances”, such as the oil price shocks of the 1970s or the bursting of the dotcom bubble in 2000, rather than shockwaves emanating from the US.
The IMF draws a distinction between “mid-cycle” slowdowns in the US, when growth drops below trend for a sustained period, and outright recessions, when US output falls. With a fall in output, US imports tend to decline rapidly.
However, mid-cycle slowdowns, particularly those characterised by internal issues such as the end of a real estate boom, do not have big effects elsewhere.
Better monetary policy and more flexible exchange rates outside Asia should also mitigate the spillovers from the US, the IMF says. The report emphasises the importance of exchange rate moves in reducing global imbalances, arguing that the US may be more responsive to changes in the external value of the dollar than previously recognised.