IMF Managing Director says policymakers face a difficult balancing act on food, fuel prices. (photo: Newscom)
Economic Forum of the Americas
"Policymakers can respond in two ways: they can take the mercantilist approach, looking only at what is best for their country. Or they can look for multilateral solutions. History has shown us the defects of the first approach but also the difficulties of the second," Strauss-Kahn said at the International Economic Forum of the Americas in Montreal on June 9.
Extended U.S. slowdown
In a wide-ranging speech, Strauss-Kahn said the economic outlook in the United States remains challenging and it is likely that growth will be sluggish not just in 2008 but also in 2009.
"I am only partly reassured by data for the first quarter of 2008 that show that so far output in the United States is not contracting," the Managing Director said,. He pointed to the interaction between credit tightening and the fall in U.S. demand, especially household spending.
"The United States is experiencing a nationwide decline in house prices that is unprecedented in the post-war era. And the extent of losses to investors and financial institutions globally—not just in the United States but also Europe and in Canada—is also unprecedented," he said. [see related speech by Anoop Singh, Director of the IMF's Western Hemisphere Department]
Canada faring better
Canada's economy is not immune to the slowdown in the United States, he added. Its close links to the U.S. make it particularly vulnerable to the U.S. downturn. However, Strauss-Kahn pointed out that the scenario for Canada is more optimistic and IMF forecasts indicate a resumption of modest growth in the remainder of 2008 and in 2009.
"Canada's strong fiscal and monetary frameworks, coupled with the monetary and fiscal policy stimulus underway, should help the economy face the challenges posed by the U.S. economic slowdown, " he said, noting that Canada's markets and financial institutions have fared better relative to most advance economies.
Latin America's inflation concerns
Turning to Latin America, Strauss-Kahn commended the region for strong fiscal and external positions that have so far shielded countries from significant fallout from the global financial crisis and sharply rising world commodity prices.
But he warned that inflation is "the more immediate challenge" facing the region. "Over the past year, inflation rates have reached double-digits in a number of countries. The task for policymakers is to ensure that the initial impact of the supply shock on prices is contained and that macroeconomic policies successfully prevent higher inflation from becoming entrenched in expectations and wage demands."
Global response
Addressing the possible contribution of a global response to these developments, Strauss-Kahn said cooperation on policies between different countries can make the problems of all easier to solve.
The very limited appreciation of the Chinese renminbi over the past year, for example, has meant that most of the global exchange rate adjustment that has taken place among major currencies has been between the U.S. dollar and the euro, as well as other free-floating currencies, including the Canadian dollar.
This makes life more difficult for businesses—and for the U.S. Federal Reserve and the European Central Bank—and helps to feed inflation in China.
"For the sake of both China and the global economy I hope that the Chinese authorities will soon allow more appreciation of the Renminbi," Strauss-Kahn added..
Comments on this article should be sent to imfsurvey@imf.org
