IMF warns of spillover if US slowdown spreads

Washington, Apr 5: The US economic slowdown is still being driven largely by a cooling housing market, but any spillover into the rest of the world should be limited as European economies are strengthening, the International Monetary Fund said.

However, if the downturn in the U.S. housing market spreads to consumer spending and business investment, then larger cross-border repercussions can be expected, the IMF said in initial chapters of its semi-annual World Economic Outlook, due to be released in full on April 11.

''In that case, policymakers would need to respond in a flexible, forward-looking and timely fashion to help cushion the impact of weaker external demand,'' the IMF said on wednesday.

Many analysts think U.S. economic growth will fall below a 2 percent annual rate in the first quarter of 2007 but that growth may accelerate in the second half of the year.

Preliminary IMF figures estimated U.S. growth at 2.6 percent in 2007 and 3.0 percent next year, both 0.3 percentage points lower than the fund's September forecast.

The IMF said any spillover from the U.S. downturn will mainly affect countries that have close trade and financial ties with the United States, particularly in Latin America and Canada.

In contrast, Africa and the Middle East will be little affected, it added.

''There is also evidence that the potential size of growth spillovers from the U.S. has increased over time, consistent with the notion that greater trade and financial integration magnify the cross-border effects of disturbances,'' the IMF cautioned.

The IMF's research comes amid debate over how the slowing of growth in the world's largest economy could affect others.

The IMF said the slowdown should be monitored carefully because softer growth could be a precursor to a wider global downturn.

One concerns is that the U.S. economy could become a victim of soaring deficits in trade, especially with key Asian countries like China.

The Bush administration has long been pressuring China to let its yuan currency appreciate more rapidly in value amid growing impatience among U.S. lawmakers at China's reluctance to do so. Losing patience, the U.S. Commerce Department last week slapped hefty anti-duties on some Chinese paper imports.

The IMF noted that it may be possible to shrink U.S.

deficits more quickly than is generally assumed and that changes in exchange rates can help.

It said its own analysis showed U.S. dollar depreciation of less than 10 percent could bring about a narrowing of 1 percent of gross domestic product in the U.S. trade deficit.

''This compares to estimates commonly found in the economics literature that a 10 to 20 percent real dollar depreciation would be needed for such a reduction in the trade deficit,'' the IMF added.

''The responsiveness of trade to changes in the real exchange rate is greater the more flexible the economy,'' it said.

Reuters