WASHINGTON (Reuters) - The U.S. economic downturn is likely to slow economic growth in other Western Hemisphere countries while high-priced commodities and domestic demand is seen exacerbating inflation pressures, the IMF said on Friday.
U.S. economic growth is expected to be an anemic 0.5 percent in 2008, rising to just 0.6 percent next year, according to IMF estimates, as fiscal and monetary stimulus plans begin to bear fruit and bank balance sheets are cleaned up from the subprime mortgage-related losses.
The one overriding risk is increased inflation pressures, especially from food prices, the IMF said in its regional economic outlook report.
“In this situation, where we have shocks from external sources such as food prices, the main priority is to avoid these getting either entrenched or entering wage negotiations,” IMF Western Hemisphere director Anoop Singh told reporters.
“That would be my number one candidate that we have to prevent the second-round effects, clearly, but where these second-round effects generally are the most potent and the most dangerous is when they affect wage negotiations,” he said.
Strong demand from emerging markets and increased use of agricultural products and energy in making biofuels “suggest that international pressures on food and energy are likely to remain.”
For low-income countries in the region, food price inflation hits particularly hard as the poor devote a larger share of their income to food.
Canada’s economy is projected to grow 1.3 percent this year, less than half the rate of growth in 2007. Growth is expected to rebound to 1.9 percent in 2009.
“Canada’s growth is expected to slow this year as the downdraft from the U.S. economy outweighs solid domestic demand supported by strong commodity prices,” the report said.
In a break from past experiences, Latin America and the Caribbean region are believed to have weathered relatively well much of the financial turmoil originating in the United States.
However, rising commodity prices along with rising domestic consumption in Latin America are expected to pull the region in 2008 from a small current account surplus to a deficit, the first in five years.
“Combined with somewhat less buoyant net capital inflows, reserve accumulation is projected to moderate,” the report said.
Chinese demand for commodities and increasing trade links with Latin America especially, is helping mitigate the impact of a slowing global economy.
In areas such as the Caribbean, the impact of global financial turmoil was less pronounced on regional markets because of limited direct exposure to structured credit products and low levels of financial integration.
Taken together, the economies of Latin America and the Caribbean are expected to grow 4.4 percent in 2008, down from an estimated 5.6 percent last year. Economic growth is expected to skid lower in 2009 to 3.6 percent, the IMF reported.
The rise in domestic consumption has also led to an increase in the extension of credit facilities, either through loans or credit cards, that has helped fuel consumer spending.
In the case of Latin America, Singh said there was concern about rising use of credit but that he did not see a full-fledged credit boom, calling it instead a “mini” boom.
Noting that credit booms historically translate into a deterioration of credit quality, Singh said there were two main mitigating factors.
“The first is that the increases are taking place over a very low base,” he said, adding that perhaps the region is rising to a new level of financial sophistication, similar to what has been seen in the emerging markets of Asia.
A second reason is “a concerted effort to upgrade regulation and supervision,” he said.
“In many countries the regulations preclude investment in the kind of derivative and other financial asset products that are currently the problem in the global markets,” Singh said.
Additional reporting by Adriana Garcia; Editing by James Dalgleish