IMF updates "World Outlook" -- What you should know
September 20, 2006

The International Monetary Fund (IMF) updated the World Economic Outlook, which forecasts faster rates of growth than did their April Outlook. The IMF predicts the global economy will grow 5.1% in 2006, and 4.9% in 2007, both of which are .25% higher than their April forecasts. U.S. growth will slow to 2.9% in 2007, down from 3.4% in 2006

They warned of the following five risks to the world economy:

1. Global inflation is increasing as a result of higher productivity and some capacity constraints. As a result, central banks are increasing interest rates, which will slow the rate of growth over the next two years.
2. The price of oil will stay at current ranges or higher, thanks to geopolitical conflicts in oil-producing countries and rising demand from China and the U.S.
3. The price of commodities such as gold, copper, and other metals, will return to a lower base as new supply becomes available.
4. The U.S. current account deficit (trade and budget deficits) will grow to 7% of U.S. GDP in 2007. This increases the chance of a run on the dollar, if the countries who are lending to the U.S. (Japan, China and oil-producing countries) decide to call their notes and start investing in their own countries. This could cause a panic, as all investors try to withdraw their funds before the dollar drops lower. It is more likely that current multinational efforts will allow for a slow decline in the dollar offset by gradual increases in the Euro, yuan, and yen.
5. The failure of the Doha round of trade talks indicates that bilateral trade agreements will proliferate, to the greater advantage of those emerging market countries that engage in them.

What It Means:
The global economy is strong. While U.S. growth is slowing, China, Europe, Japan and some other emerging markets are more robust. While there is a serious risk of oil price spikes or a run on the dollar, a more likely threat is inflation. This will cause central banks to continue to increase interest rates.

Action Steps:
Protect yourself from inflation by adding Treasury Inflation Protected Securities (TIPS). Make sure you have a good oil sector mutual fund, but don’t add any more to your commodities funds. These funds will also help hedge against a dollar decline.

Source: IMF web site, "World Economic Outlook"