The View from the IMF Chief

Worst of Crisis May Be Yet to Come: IMF Chief

The head of the IMF questioned on Monday debate about when to roll back stimulus spending, saying the world economy had yet to weather the worst of a recession that claimed a record number of European jobs.

The 16-country euro zone lost a record 1.22 million jobs in the first quarter, official data showed. The number of employed fell 1.2 percent year-on-year, the deepest annual drop since measurements started in 1995.


"Markedly weakening labor markets are a major threat to recovery prospects in the euro zone," said Howard Archer, economist at IHS Global Insight. Data were little better in the United States.

The factory sector in New York state shrank at a more severe rate in June than the previous month, the New York Federal Reserve said in a report.

The New York Fed's "Empire State" general business conditions index fell to minus 9.41 in June from minus 4.55 in May. The survey of manufacturing plants in the state is one of the earliest monthly sign posts to U.S. factory conditions.

Further underlining the fragile state of the global economy, an influential economist said China would not see a rapid rebound and South Korea's finance minister said its economy was still sliding, although the pace had slowed.

But in southern Italy, Group of Eight finance ministers meeting at the weekend described their economies in the most positive terms since the collapse of U.S. bank Lehman Brothers nine months ago heightened the world's worst financial crisis since the Great Depression of the 1930s.

"Their (G8) stance is that we are beginning to see some green shoots but nevertheless we have to be cautious," International Monetary Fund chief Dominique Strauss-Kahn said during a visit to Kazakhstan. "The large part of the worst is not yet behind us."

Keep the Stimulus for Now

In its annual consultation with the United States, the IMF said policy-makers were correct to keep stimulus flowing for now, but would need to turn their attention to the threat of ballooning deficits once the crisis has passed.

"The combination of financial strains and ongoing adjustments in the housing and labor markets is expected to restrain growth for some time, with a solid recovery projected to emerge only in mid-2010," the IMF said at the conclusion of annual discussions with the U.S. The Fund projected the U.S. economy would contract by 2.5 percent this year, with a modest expansion in 2010 of 0.75 percent.

This compares to the IMF's April forecast for the United States, which projected the economy to shrink by 2.8 percent in 2009 and show zero growth next year.

It said Washington's fiscal boost would lift annual gross domestic product by 1 percent in 2009 and 0.25 percent in 2010.

Still, the IMF said the outlook for the U.S. economy is marked by an unusual level of uncertainty and a recovery could be clouded by further home foreclosures and falls in house prices along with rising unemployment.

If economic activity failed to pick up, the IMF said additional fiscal stimulus measures should be considered while the U.S. Federal Reserve should maintain its current level of low interest rates.

As the economy starts to strengthen and a recovery is clearly under way, the IMF said the U.S. should develop and communicate an exit strategy to withdraw monetary stimulus.

The Fund forecast that over 2009-2011 the federal deficit will average 9 percent of gross domestic product and that debt held by the public will nearly double to 75 percent of GDP.

Pressure Building

Pressure has been building in the G8, particularly from fiscally conservative nations such as Germany and Canada, for plans to wind down stimulus as soon as it is no longer needed. But ministers in Lecce differed over how quickly to start rolling back state spending plans and hiking interest rates.

Treasury Secretary Timothy Geithner indicated the United States was unlikely to tighten policy soon, saying: "It is too early to shift toward policy restraint."

Writing in the Washington Post on Monday, Geithner said a sweeping financial regulation reform plan to be released this week would target capital requirements, securitization and other problem areas blamed for the global financial crisis.

The largest and most interconnected firms could expect to face more stringent requirements. While regulatory changes may be in the offing, most experts say they do not expect major tightening of fiscal and monetary policy in the developed world before next year.

According to media, France is headed in the opposite direction. Paris plans to pump an extra 3.5 billion euros ($4.92 billion) into stimulus measures earmarked for 2010, Les Echos newspaper reported on Sunday.

Fragile

Li Yang, a former adviser to the People's Bank of China, said he expected China's recovery to be "W-shaped" — meaning growth will falter once fiscal and monetary stimulus wears off, before regaining momentum.

"China should not count on a turnaround of external demand to bring about its recovery," Li, director of the finance institute at the Chinese Academy of Social Sciences, was quoted by the Shanghai Securities News as saying.

South Korean Finance Minister Yoon Jeung-hyun said it was too early to consider reversing stimulus policies.

"The economy is certainly still sliding, although the pace of decline is slowing," he said. "Let me make it clear that we are not at the stage for a change in the aggressive fiscal stimulus and financial easing policy stance." Aviation leaders attended the Paris Air Show on Monday hoping for new business to bolster a ravaged industry.

"It is ... in the hands of the travelling public, who are voting with their feet and not getting on planes or buying tickets," said Richard Aboulafia, vice president at U.S. aerospace and defense consultancy Teal Group.

European shares shed 1.5 percent, Tokyo's Nikkei closed 1 percent lower and U.S. stock futures pointed to a sharply lower open on Wall Street.

The European benchmark index is up 35.9 percent from the lifetime low it hit on March 9, as investors have become less gloomy on the prospects for economic recovery.

"We've verified that markets have bottomed out but we have yet to see what sort of form the recovery will take and we need clear proof that it will continue," said Masayoshi Okamoto, head of trading at Jujiya Securities.


The EURO tanked today because their economy is falling faster than ours. So much for the weak dollar theory. You will know when the economy is growing WHEN THEY RAISE THE INTEREST RATES. That is a long time off. The started to raise the rates in June of 2004 the economy topped in Q4 of 2007. Buy the way they started lowering the rates in August of 2007. The following Qtr the GDP declined. They told us then don't fight the Fed that they would save the day...remember? Well the rates are still down. That is all you need to know about the state of the economy.

To know the economy is growing wait for the Fed to raise rates.


Mikey