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January 28, 2008

Concerns over US outlook cloud WEF meeting

Serious slowdown, though not recession, was predicted for the U.S. economy on Saturday as political and business leaders were ready to wrap up their annual gathering at the Swiss skiing resort of Davos.

The World Economic Forum, which was kicked off here Wednesday, was clouded this year by mounting concern over the U.S. economic outlook in the aftermath of the sub-prime mortgage market crisis, with some economists even warning the U.S. economy is headed for a recession.

"Whatever the answer is on a recession, what is clear is there will be a serious slowdown" in the United States, Dominique Strauss-Kahn, managing director of the International Monetary Fund(IMF), said at a panel discussion on the economic outlook this year, calling for a serious response.

Strauss-Kahn said the IMF was scheduled to update its economic forecasts next week, which is certain to have a lower growth figure for the United States.

IMF spokesman Masood Ahmed told reporters Friday that they saw a period of below-potential economic growth for the United States, saying the recent sharp interest rate cut by the U.S. Federal Reserve was appropriate and helpful.

"We still see a period of below-potential growth as the most likely scenario for the U.S. given the economy's good starting position," Ahmed said.

The IMF's worry was shared by Merrill Lynch Chief Executive John Thain, another panelist of the discussion.

Thain said housing prices in the United States, which fell 7 percent year on year in 2007, are expected to fall further this year.

Thain also feared the current problem in the credit market was spreading to consumer credit sector.

Credit cards, home equity loans and auto receivables are the next vulnerable areas, he noted.

"It's going to be a while before we see a return to normalcy inthe banking or credit markets in the U.S.," he said.

Thain said he supports the U.S. Federal Reserve's decision to cut interest rates and the government's economic stimulus package, but said these measures would not keep house prices from falling.

It is also unclear if lower interest rates will spur more lending, given the credit market meltdown, Thain said.

Strauss-Kahn said the priority now is to correct malfunctioning of financial markets and restore economic confidence.

He urged central banks to continue to provide liquidity to the markets as they have done since last summer, when the sub-prime mortgage market crisis in the United States soon spread globally and caused widespread credit crunch in world major financial markets.

In a rare occurrence, Strauss-Kahn advised those countries with low fiscal risks to resort to fiscal policies, in combination with monetary policy.

"At least the economies with low fiscal risks have to be prepared for fiscal policies," such as the U.S. stimulus package of tax cuts, Strauss-Kahn said.

The IMF unusually encourages members to pursue fiscal consolidation and contain deficit level.

With a major downturn predicted for the U.S. economy, the world's largest economy, the whole world was feared to be dragged down.

As to emerging economies, which were taken by some as a substitute support of the world economy, Strauss-Kahn said though they would largely perform well, it was unlikely for them to be immune from the U.S. slowdown as their links with the U.S. economy do exist.

However, Indian finance minister Palaniappan Chidambaram said the U.S. slowdown, if not recession, would not have a major impact on his country, one of the emerging economies.

Chidambaram said that based on the present assessment, Indian economy would grow between 8 percent and 8.5 percent this year since investment and domestic consumption, the two leading drivers of the economy, would remain supportive.

In the case of India exports only rank as the third driver of the economy, which means India is not deeply dependent on the U.S. market, he said.

Courtesy Xinhua

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