(September 20 – 09:30 ET) – The International Monetary Fund has released its economic outlook for the world, highlighting oil prices as a risk to continued global expansion.

The IMF says the outlook for the global economy has continued to strengthen, driven by the powerful U.S. economy, strong growth in Europe, and a fragile recovery in Japan. “Nevertheless, economic and financial imbalances in the three main currency areas remain large, posing a continued risk to the global expansion, and higher oil prices have become an increasing concern.”

The IMF is now calling for a global economic expansion of 4.7% in 2000, 0.5% higher than expected in the May World Economic Outlook. The U.S. is expected to lead the way.

The IMF notes that many first world economies are now growing at or above potential, and although headline inflation is up, core rates remain subdued. Still it is worried about imbalances, including uneven GDP growth, the price differential between the euro and the U.S. dollar, and the high level of equity market valuations in the U.S. and some other countries. “The possibility that these imbalances may unwind in a disorderly fashion remains a risk to the global expansion.”

Oil prices also remain a concern. The IMF’s econometric model suggests that a $5 a barrel increase would reduce GDP growth in industrial countries by 0.2% in 2001, sparking higher inflation and interest rates. Under this cloud it suggest that the amount of monetary tightening needed to control inflationary pressures is unclear. It fears that imbalances in financial markets could spread instability worldwide.

The IMF sees a slowdown in global GDP growth to 4.2% in 2001, followed by continued strong growth at about the same rate, assuming that these imbalances are resolved in an orderly fashion. Although it warns, “[If] investors revise significantly their views about future U.S. growth and corporate earnings, there would be the possibility of a much more abrupt adjustment in equity markets… [which] could lead to a sharp decline in the value of the U.S. dollar”, with the declining demand spilling over to the rest of the world.

“To protect against such a scenario, the major currency areas will need to continue to pursue policies directed at achieving an orderly rebalancing of growth and demand.”
-IE Staff