Business | Economy
Inflation could hit Gulf growth
The growing threat of inflation is likely to take at least some of the shine off the GCC's oil price-led growth story, the International Monetary Fund (IMF) said yesterday in its half-yearly World Economic Outlook (WEO).
- By Babu Das Augustine, Banking Editor
- Published: 23:55 October 17, 2007
Washington: The growing threat of inflation is likely to take at least some of the shine off the GCC's oil price-led growth story, the International Monetary Fund (IMF) said yesterday in its half-yearly World Economic Outlook (WEO).
However, the growth outlook of the GCC countries is very strong, it said.
Despite assertions by GCC central banks in the past that the dollar's weakness has little to do with domestic inflation in the region, the IMF said yesterday that the weakening dollar has added to inflationary pressures in the GCC countries which have pegged their currencies to the dollar.
The report said that with the outlook for oil and other commodity prices remaining strong, governments are likely to increase spending.
The IMF has called on the GCC governments to rationalise spending to the absorptive capacities of their respective economies to avoid any excessive demand-led overheating.
Meanwhile, the IMF yesterday predicted global economic output this year would grow 5.2 per cent, unchanged from forecasts in July. However, it added that growth will slow down by 0.4 per cent to 4.8 per cent in 2008
IMF chief economist Simon Johnson said that growth is based on solid fundamentals. However, it would lag a bit next year because of the slowdown in the US and Europe. "There are serious risks ahead. The smoke has not yet cleared from the financial market turmoil," he said.
Countrywise, the IMF said the growth momentum is strongest in China, followed by India and Russia. Growth in these countries is helping to offset some of the slowdown in industrialised economies.
"These three alone accounted for one-half of global growth over the past year, but other emerging markets and developing countries have also maintained robust expansions," the IMF's WEO report said.
China leads
Global expansion was now clearly led by China, which is expected to grow by 11.5 per cent in 2007 and slow slightly to 10 per cent next year, the IMF said.
In the developed world, the IMF downgraded its growth forecast for the US and Canada. It said the US economy was set to grow just 1.9 per cent next year, a sharp fall from the 2.8 per cent forecast in July.
The report has lowered its forecast for euro zone growth by a tenth of a per cent to 2.5 per cent for 2007 and by 0.4 percentage point to 2.1 per cent for 2008.
Independent monetary policies likely
The World Economic Outlook report said that the GCC states are expected to move towards independent monetary policies to fight inflation that will eventually have an impact on the status of the pegged currencies and the exchange rates. "Inflationary pressures are expected to persist in GCC countries as domestic demand expands in response to the increasing wealth, and the exchange rates should appreciate in response to these developments," the WEO said.
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