FYI | Oct 18 2007
By Greg Peel
The International Monetary Fund has released its recent round of global forecasts. Most notably, it has left its 2007 projection for global economic growth at 5.2%, but it has downgraded its 2008 forecast from 5.2% to 4.8%. The IMF cites global turmoil in credit markets as the primary reason.
It may be a downgrade, but its not a big one. Indeed, 4.8% global growth is still a very healthy number.
The IMF suggests that global inflation has now “taken a backseat” to the growth factor, but it nevertheless sees inflation as an ongoing concern in parts of the world beyond the US. For the US to achieve its desired 1.9% economic growth in 2008, the IMF believes the Fed will need to make a second rate cut of 50 basis points before the end of 2007. Commonwealth Research concurs with this view, although the analysts expect two cuts of 25 points, probably in October and December.
Wall Street is currently swinging backwards and forwards with each successive data release as to whether the Fed will make another cut in October. Commonwealth believes the weakness in the housing market will force its hand.
The story is different in Europe however, where the IMF expects the European Central Bank will be forced to tighten monetary policy eventually. The EU economy is still strong, and inflation remains an issue. The IMF does, however, expect ECB rates to remain on hold in the short term given credit market problems and likely Fed easing. The report was no doubt compiled ahead of the release of the EU CPI on Tuesday, which was more benign than expected.
For Japan, the IMF also sees eventual tightening, probably in the first half of 2008, after recent financial instability has settled down and inflation has picked up again. The IMF sees the Bank of Japan as being concerned by asset bubbles and indiscriminate household risk taking as a result of too-low Japanese rates.
The IMF had a bit to say about currencies, ahead of the G7 meeting which commences in Washington on Friday. It believes a weaker US dollar is still overvalued, while the stronger pound is also now overvalued. The stronger euro is about right, as is the Canadian dollar, while the yen is undervalued and a revaluation of the renminbi would help ease global imbalances.
Commonwealth notes G7 meetings rarely amount to agreement as to what to do about currencies.
As for the credit crunch, the IMF believes, or perhaps hopes, that things will return slowly to normal. But then turbulence could continue, it says.
If the US dollar is overvalued, then it’s not for want of trying by Japan and China. The August US Treasury International Capital flow data, released on Tuesday, showed Asian investors sold US$52 billion of Treasury bonds alone, led by Japan (US$23bn) and China (US$14.2bn).
London’s Daily Telegraph noted this was the first time since 1998 that foreigners have net sold US Treasuries, and one economist called the result “stunning”.
The US needs US$70 billion a month in inflows to cover its current account deficit. Over the last couple of years it had relied on foreign “hot money” coming in to cover about 30% of the short term credit and commercial paper markets, but those days are gone. Indeed, US$60 billion flowed in from British and Cayman Island based hedge funds in August in order to cover positions at the height of the credit seizure. That won’t necessarily happen again.
And it wasn’t just foreigners selling US Treasuries. Americans were getting out as well.
