Restoring balance in the global economy will require simultaneous shifts in demand and exchange rates, including a significant fall in the US dollar and a rise in some Asian currencies, the International Monetary Fund said today.
In its twice-yearly World Economic Outlook, the IMF renewed its warning that economic distortions were unsustainable and a threat to financial stability, restating the need for big currency adjustments.
Even as the lender warned of the dangers of imbalances, it projected another year of brisk expansion for the world economy, lifting its 2006 forecast for global growth to 4.9 per cent from a September outlook of 4.3 per cent.
Should that forecast materialize, it will be the fourth straight year global growth has topped 4 per cent, a stellar performance buoyed by favorable financial market conditions and accommodative fiscal and monetary policies.
"The baseline forecast is for continued strong growth, although risks remain slanted to the downside, the more so since key vulnerabilities - notably the global imbalances - continue to increase," the IMF said.
It also warned that energy prices were a growing peril. "Looking ahead, limited excess capacity in the oil sector is likely to persist well beyond 2006 and prices will continue to be susceptible to geopolitical events," IMF said.
So far, oil prices have not hit the world economy as hard as some had feared. But the IMF said it is worried the full effects of the recent surge in energy prices are yet to come, especially if producers and consumers are still treating the spike as temporary rather than permanent.
A recent heightening in "geopolitical uncertainties" in the Middle East is stoking those concerns, with options trading data suggesting a 15 per cent chance that oil prices will spike above $80 per barrel by mid-2006, IMF said.
US crude oil futures hit record highs above $71 a barrel yesterday on supply worries over Iran and Nigeria and jitters over gasoline supply ahead of the summer driving season.
Of the economic imbalances, the IMF said: "An orderly resolution of global imbalances will require measures to facilitate a rebalancing of demand across countries and a realignment of exchange rates over the medium term, with the US dollar needing to depreciate significantly from current levels, and currencies in surplus countries - including in parts of Asia and among oil producers - to appreciate."