India and China are the new drivers of global economic growth, replacing the United States and other developed countries, according to Rodrigo Rato, managing director of the International Monetary Fund.
He noted that while in 2006, the U.S. had been the main source of global growth, for the first time China will have the biggest contribution, Rato said according to a prepared statement for a business conference in the Philippines. He noted that the U.S. housing downturn was curbing growth.
He said China would grow by more than 11 percent and India at around 9 percent this year, with almost equal rates in 2008. In contrast, he the U.S. growing at a rate of 2 percent this year.
...we expect China - and increasingly India to grow in importance as engines of global growth, Rato said.
The US would recover from the present economic slowdown and regain momentum gradually as the drag from the current housing correction and the softness in the business sector dissipates, Rato said.
He also noted that prospects in Europe and Japan were good without giving specific figures.
The outlook for the global economy is generally good and the economic prospects of most countries in emerging Asia are also good, he said.
However, Rato warned of the risks from financial globalization, mentioning the sub-prime mortgage market in the U.S., debt financed leveraged buyouts, instability from capital inflows.
he also warned against the danger of a backlash against globalization citing possible causes as an uneven distribution of gains from economic growth.
The best way to address this inequality was to increase investment in education and technology and give the poor more access to infrastructure, utilities and financial services so they could also benefit from globalization as well, he said.
The IMF chief also expressed concerns about the oil market and capital flows, saying while the global economy had easily shrugged off the high oil prices driven by increased demand, a supply shock could be much more damaging to global growth.
Inflows of capital to emerging economies could complicate macro-economic management and expose the countries that receive them to an abrupt reversal of flows when sudden shocks occur, he said, adding that the emerging economies could best respond to this by pursuing a flexible exchange rate with limited intervention to smooth volatility in the exchange markets.
In some cases, fiscal tightening is also appropriate. In addition to reducing inflationary pressures, this can reduce vulnerabilities by limiting the accumulation of debt, he suggested.
Rato also warned that global investments and growth prospects were at a risk from a dramatic rise in private equity buy-outs. The trouble in the U.S. subprime housing market, he said, was an example of such risks and called for a fresh look at lenders' underwriting standards and more borrower education.
There is ground for concern in the recent dramatic growth in large private equity buy-outs, the IMF chief said.
Such deals financed by huge debt could trigger risk aversion when they turn sour, curtailing broad market access, he explained.
This in turn could adversely affect investment and growth prospects, not just in the countries where the problems occur but worldwide, he said.
I would urge regulators to remain vigilant about these deals, and pay especially close attention to deals whose failure could have systemic implications, he added.
However, Rato said the outlook for global economic growth remained generally good, as well as for economies in emerging Asia despite the negative impact of expected lower growth in the US.
In its latest projections released last week, the IMF forecast world growth of 5.2 percent in 2007 and in 2008, compared with 5.5 percent in 2006.
Meanwhile, IMF chief economist, Simon Johnson said that except for the US which is continuing to show weakness - the rest of the world economy has done very well.
Citing Germany and the fast-growing emerging economies of China and India, Johnson said that the world was witnessing a global boom and predicted that the US is poised for a lift after limping along at a 0.7 percent growth pace in the first quarter.