INTERNATIONAL MONETARY FOUND WORLD ECONOMIC OUTLOOK SEPTEMBER 2006 – APRIL 2007

Global Economic Growth 2006 expanded vigorously (5.4%) expected to moderate to 4.9% in 2007 and 2008 US: sharp downturn housing market oil prices decline (August 2006)‏ Growth is expected to slowdown to 2.2% (from 3.3% in 2006)‏ EU: fastest pace in six years domestic demand Growth is expected to slowdown: tightening of Monetary and Fiscal policies. JAPAN: activity regained traction end 2006 after a mid year patch is expected a constant growth LDC: high commodities prices supportive financial conditions expected to grow strongly but a slower pace

Inflation Strong growth and rising oil prices (first half 2006) raised concerns on inflation, but pressures have moderated with the decline of oil prices since August.

Financial Markets On background strong growth and reduced concerns on inflation: positive trend despite Feb-Mar 2007 volatility crisis and concerns on US subprime mortgage market - equity markets close to all time highs - real long-term bond yields remained below long-term standards - risk spreads have narrowed

Exchange Rates Dollar weakened mainly on Euro and Pound Yen depreciated further (prospects low interest rates and capital outflows)‏ Renminbi declined modestly in real effective terms despite a mild acceleration in its rate of appreciation on the dollar

Global Trade Imbalances US current account deficit rose to 6.5% of GDP although the non-oil trade deficit declined as a percentage of GDP as exports accelerated Surpluses in Japan, China, and the Middle Eastern oil-exporting countries increased further.

Monetary Policies FED: interest rates on hold since June 2006 balance risk between cooling economy and concerns on inflation ECB: continued to remove monetary accommodation rising interest rates to 4% by the summer would seem warranted Bank of Japan: raising interest rates gradually since exiting its zero interest rate policy in July 2006 need more evidence of strength of expansion Emerging market countries: in general they tightened monetary policies

Fiscal policies Advanced economies continued to strengthen their fiscal policies. Germany, Japan, and the USA reduced substantially their budget deficits. Fiscal gains largely reflected strong growth of tax revenues in cyclical upswing. “Fiscal policies should be directed at achieving the necessary consolidation and reform to maintain viability in the face of aging populations, while providing room for automatic stabilizers to work as needed.” Need to avoid erosion of revenue base. With expansion firmly established now is time for structural reforms.

2006 – USA GDP Growth slowed down 2.9 ( expectations 3.4), slowdown in housing sector

2006 – USA Monetary Policy Persisting inflation risk, not advisable to lower interest rates

2006 – USA Fiscal Policy prospect of halving Federal deficit one year ahead of expectations surplus money resulting from fiscal tightening policies should be used for reforms in face of an aging population and rising health care costs.

2007 – USA GDP Growth slowed down markedly from expected 2.9% to 2.2% housing sector crisis is slowly coming to an end Mid-cycle crisis or start of recession? Unemployment rate stable at 4.8% Dollar depreciation will help exports and a rising GDP

2007 – USA Monetary Policy Rising Interest rates halted in august 2006 Inflation: eased in early 2007 but inflationary risk is not yet over

2007 – USA Fiscal Policy Federal Budget deficit slowed down (from -2.9% to -1.9%) is expected a consolidation of Fiscal policy

Latin America Growth decline GDP decreasing everywhere except Brazil Chile Inflation sustained – restrictive monetary policies Risk Left wing tendencies (Evo Morales, Chavez, Lula) Public Debt Need structural reforms Oil Price Venezuela Brazil (Petrobras)‏ bilateral treaties with foreign governments (USA)‏

Africa constant growth non-fuel commodities oil (Angola Sudan Nigeria) gas (Algeria)‏ contained inflation and strong public debt Foreign Direct Investments Aid Political Stabilization Problem of Civil Wars Policy-makers – income utilization (Ghana Nigeria) Needed Marketed-oriented Reforms

Risks to the Growth Outlook Potential for a sharper slowdown in the US housing sector (key issue: decoupling from US)‏ Retrenchment from risky assets in financial markets Risk that inflation pressures could revive as output gap continue to close, particularly in an event of rising oil prices Low probability but high risk of a disorderly unwinding of large global imbalances

Overall risks to the outlook seem less threatening than six months ago but remained weighted on the downside, with increasing concerns about financial risks.

Multilateral Initiatives Cooperative policy actions are necessary to support the smooth unwinding of large global imbalances. Raise savings in the US Growth-enhancing reforms in Euro area and Japan Exchange rate flexibility in some part of emerging Asia (especially China)‏ Revival of Doha round is welcomed since trade reforms are needed against the risks of protectionism and for sustaining a gradual unwinding of global imbalances.

Conclusion Notwithstanding the recent bout of financial volatility, the world economy still looks well set for continued robust growth in 2007 and While the US economy has slowed more than was expected, spillovers have been limited. Latin America and Africa need Structural Reforms