Divisions deepen over slowdown
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Emerging Markets

Divisions deepen over slowdown

US Treasury dismisses warnings as experts sound the alarm

US Treasury undersecretary Tim Adams has reiterated his belief that there are no looming threats to the global economy, despite growing anxiety over a sharp slowdown by other financial strategists.

In an interview with Emerging Markets, on the eve of the G7 finance ministers’ meeting in Singapore today, Adams struck a defiant note when challenged on incipient threats to the world economy.

“We’re huddling here this weekend against the backdrop of very strong global growth – some of the most balanced global growth we’ve seen in a very long time,” he said. “I do not see any imminent threats.”

Adams’s remarks contrast sharply with those by other leaders of the financial community interviewed. They pointed to the dangers inherent in the US slowdown and rising protectionist pressures.

Concern is also mounting about the threat of a disorderly unwinding of global financial imbalances unless concerted actions are taken to rebalance demand in the international economy.

Adams said G7 ministers will today “continue the conversation about everyone’s respective role in resolving the global imbalances” and pointed out “it’s an opportunity to better understand these forces.”

“The key is to find the sweet spot of a soft landing for the US economy where growth is around trend, 2.9% to 3%, and a balancing of growth around the global economy,” Adams said. “That will help bring about the adjustments in global imbalances.”

Other opinion formers interviewed were considerably more cautious. Former US Federal Reserve chairman Paul Volcker yesterday told Emerging Markets he believes there are “considerable risks” in the global economy. “Our experience with orderly unwinding [of global imbalances] has not been very good,” he added.

Former US Treasury secretary Larry Summers told Emerging Markets that the risks of substantial financial disruption “are certainly larger than we need to be running.”

These warnings echo suggestions in the IMF’s World Economic Outlook that “the balance of risks to the global outlook is slanted to the downside” and that growth of the world economy could fall to 3.25% or less next year, instead of the 4.9% base level projected in the WEO. The “potential for a disorderly unwinding of global imbalances remains a concern,” the IMF added.

Citibank president and CEO William Rhodes meanwhile noted that “there has been no progress in dealing with these imbalances over the past year”.

A smooth unwinding of these imbalances would require global investors to continue raising their holdings of US dollars for many years, which is an “unlikely” prospect IMF Chief economist Raghuram Rajan commented.

Fears of a global economic slowdown, linked to weakening in the US and to what Rajan called a “rising tide of economic nationalism” are hanging heavily over the annual meetings.

“It is 100% certain there will be a global slowdown” as a result of the weakening US economy, former US White House financial advisor David Hale and founder of Chicago-based Hale Associates said.

US economic growth is likely to slump to 2.5% in 2007 from around 4% in 2006 on the back of falling consumption, said Hale. This in turn in is linked to US house prices, which he said are falling “for the first time since the 1930s”.

The US slowdown could knock 1 or 1.5% off East Asian growth next year, as every 1% drop in US growth rates reduces China’s exports by 8%, Hale added.

Protectionism is identified as a growing threat. An economic slowdown would provide a “fertile breeding ground for protectionism,” AIG vice chairman Jacob Frenkel told Emerging Markets.

It has been kept at bay by strong growth in recent years but as national elections approach in various countries and job concerns grow, it could become a real threat to the global economy, he said.

“There is a temptation to introduce protectionist measures to deal with the inability of policymakers to get their own house in order,” he said. The collapse of the WTO ‘s Doha Round is also feeding into fears or rising protectionism.

Adams said that the G7 will make a string push to reinvigerate global trade talks in today’s meeting.

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