MUMBAI (Reuters) - Economic slowdown in the United States will be significant and will last for some time, the head of the International Monetary Fund said on Monday, calling for a coordinated response to financial turmoil around the world.
By V. Ramakrishnan and Anurag Joshi
MUMBAI (Reuters) - Economic slowdown in the United States will be significant and will last for some time, the head of the International Monetary Fund said on Monday, calling for a coordinated response to financial turmoil around the world.
While it was unclear how long the crisis facing international banks over subprime losses would last, complex financial links between regions may mean emerging economies could also be hit if the situation worsened, IMF Managing Director Dominique Strauss-Kahn said in a speech.
Uncertainties facing markets and policymakers included a possible worsening of the U.S. housing market, which would hurt consumption, and any more disclosures from European banks on losses resulting from the market turbulence.
!ADVERTISEMENT!"The problem is today we have unknown unknowns," he said at the start of a three-day visit to India.
Last month, the IMF cut its forecast for world growth this year in the face of continued stress in global credit markets, and warned that economic activity could slow even further.
The IMF chief said the main reasons for the revision were the weak growth outlook in the United States and Europe.
The Fund lowered its global 2008 growth projection to 4.1 percent from 4.4 percent, reflecting a marked slowdown from the 4.9 percent pace achieved last year.
Slowing of the U.S. economy has worried investors and policymakers and concerns have also surfaced that the U.S. downturn is spreading to the 15-nation euro-zone economy.
"For the U.S. at least, the slowdown will be both significant and will last for some time," Strauss-Kahn said.
"There is no way to escape a rather long period of slowdown in economic growth."
GLOBAL SOLUTIONS
He said global solutions had to be found to the financial market turmoil and there were already signs of coordination between the U.S. Federal Reserve and the European Central Bank.
"We are in a globalized world and global problems require global solutions," he said.
"I am not arguing that it has to be today," he said. "What I am arguing is that everybody should prepare themselves to something that had to be coordinated because, again, there is no local answer to a global problem."
Finance ministers and central bankers from the Group of Seven (G7) top industrialized nations said at the weekend the U.S. economy was likely to escape a 2008 recession but more work was needed to restore markets to good working order and safeguard global growth.
The G7 leaders also urged banks to fully disclose losses and shore up balance sheets to restore markets to normal.
Strauss-Kahn called the message from the G7 finance leaders "positive" but said while exposure of European banks to the subprime market could be lower than American banks, they could also be facing losses as they invested in complex instruments.
He added that "a lot of disclosures may come in European banks."
The IMF has also cautioned that the main risk to the global outlook was ongoing turmoil in financial markets, which would further reduce domestic demand in advanced economies and create more significant spillovers into emerging markets and developing economies.
Strauss-Kahn said decoupling between emerging markets and developed economies was a "misleading idea."
"The linkages between the financial and real sector, developed and emerging markets, are much more complex than they were before," he said.
(Editing by Charlotte Cooper and Stephen Nisbet)
