Tue Sep 9, 2008 7:16am EDT
FRANKFURT (Reuters) - 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 said on Tuesday.
IMF first deputy managing director John Lipsky 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 5 percent in 2007 to about 3 percent late in 2008, reaccelerating towards 4 percent in 2009.
The IMF's last forecasts in mid-July were for global growth of 4.1 percent in 2008 and 3.9 percent in 2009. A G20 source told Reuters last month that these would be downgraded to 3.9 percent this year and 3.7 percent in 2009.
Lipsky said the 2009 pickup would be driven by an unwinding of the effects of the past 50 percent increase in oil prices and a bottoming in the U.S. housing sector. Oil traded at a five-month low below $105 per barrel on Tuesday.
GROWTH FORECASTS
In the United States, the IMF expected growth of about 1 percent in 2008 on a fourth-quarter-on-fourth-quarter basis, recovering gradually to about 1.5 percent in 2009, Lipsky said. This calculation was different from the annual growth rates forecast in its headline projections, he stressed.
In mid-July, the IMF forecast U.S. growth of 0.3 percent in 2008 and 1.9 percent in 2009 on a Q4/Q4 basis, with full-year growth seen at 1.3 percent in 2008 and 0.7 percent in 2009.
In the euro area, the IMF projected growth on a Q4/Q4 basis at about 0.75 percent in 2008 and about 1.5 percent in 2009, from 1.3 percent and 1.7 percent respectively in mid-July.
Lipsky said that although the IMF expected commodity prices to remain high in real terms, slower growth and cheaper oil should help to contain inflation pressure in advanced economies.
"Thus, policymakers can afford to keep rates on hold in the face of elevated headline inflation, while watching closely for signs of easing price pressure that would permit a more accommodative stance in economies with relatively high real interest rates," he said.
The European Central Bank held rates at 4.25 percent last week but is expected to cut them in mid-2009 and the Bank of England's next move is also likely to be a cut. The U.S. Federal Reserve is expected to stay on hold for now, after cutting rates in the past year.
Lipsky said that in emerging markets inflation pressures were growing while real interest rates remained low and some central banks may be "behind the curve" with their monetary policy.
"Policies in these instances need to be tightened, lest central banks run the risk that hard-won policy credibility could be eroded. In some cases, allowing greater exchange rate flexibility would provide room for operating a more independent monetary policy."
The IMF saw growth in emerging and developing economies of just over 6 percent in 2008 on a Q4/Q4 basis, broadly in line with the IMF's mid-July outlook.
(Reporting by Krista Hughes; Editing by David Stamp)