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IMF worried about effect of high energy prices

Hurricane Katrina’s reach is global, as higher energy prices cast a cloud of uncertainty over a world economy that otherwise is on track to log solid growth this year, it was reported Wednesday.
/ Source: The Associated Press

Hurricane Katrina’s reach is global, as higher energy prices cast a cloud of uncertainty over a world economy that otherwise is on track to log solid growth this year, it was reported Wednesday.

The global economy is projected to grow by 4.3 percent in both 2005 and 2006, with the projection for 2006 slightly lower than the growth rate previously predicted, the International Monetary Fund said in its latest World Economic Outlook.

One of the biggest risks is the possibility that energy prices will march higher, causing consumers and companies to turn more cautious, slowing economic activity.

“Higher oil prices are a clear and present danger,” said the IMF’s chief economist, Raghuram Rajan.

At the least, energy prices — already elevated before Katrina struck the Gulf Coast in late August — are expected to nibble at world economic growth.

While the 4.3 percent growth projected for the world economy this year is healthy, it would mark a slowdown from the blistering 5.1 percent increase posted in 2004.

The IMF’s forecasts are based on an assumption that world oil prices would average $54.23 a barrel this year and $61.75 a barrel in 2006.

While manufacturing and trade are strengthening around the world, the continued rise in energy prices “exacerbated by the catastrophic effects of Hurricane Katrina is an increasingly important offset,” the IMF said. The killer storm knocked out oil production and refining facilities along the Gulf Coast.

Spare oil production capacity will probably remain low and short-term supply uncertainties persist. Along with strong demand, those factors will keep supplies tight and will keep upward pressure on energy prices.

“Oil price increases are thus unlikely to be benign going forward,” Rajan said.

For the United States, the IMF is predicting economic growth will increase by 3.5 percent this year and 3.3 percent next year. Those projections are lower than the 3.6 percent growth for 2005 and 2006 the IMF had forecast in April.

“Growth in 2005 will be about 0.1 percentage points lower as a result of Katrina,” Rajan said.

The downgrade comes from the belief that higher energy prices will force consumers and businesses to spend less on other things, slowing overall economic activity.

In the United States, oil prices briefly surged to an all-time high of $70.85 a barrel on Aug. 30, when Katrina made landfall. They have moderated since then and are now trading above $66 a barrel.

Katrina destroyed lives, homes and businesses in Louisiana, Mississippi and Alabama, and disrupted the flow of cargo into and out of the country.

The IMF’s new forecasts, however, still would represent respectable growth for the United States, although not as robust as last year’s 4.2 percent gain, the strongest showing since 1999.

What happens in the United States — the world’s largest economy — is important because of possible ripple effects it may have on other countries’ economies.

Federal Reserve Chairman Alan Greenspan and his colleagues said Tuesday they don’t believe fallout from Katrina poses a “persistent threat” to the United States’ economic health.

The IMF report seemed to strike a similar note, saying the damage to the economy is likely to be modest and temporary. The billions of dollars that are expected to be sunk into rebuilding ravaged communities will eventually help energize overall economic activity, the IMF noted.

President Bush wants Congress to approve a massive reconstruction program for the Gulf Coast. The federal government’s costs could reach $200 billion or more. Congress already has approved $62 billion.

On other issues, the IMF said surging house prices in the United States bear watching.

Since the late 1990s, house prices in the United States have risen rapidly. IMF staff estimates suggest that at least 18 states, accounting for more than 40 percent of overall economic output in the country, are currently experiencing housing booms.

“While house price booms do not necessarily end in busts, recent house price increases have raised concerns that the market could be increasingly susceptible to a correction,” the IMF said.

In a few industrial countries, house prices are “ignoring the laws of gravity,” Rajan said.

Elsewhere in the World Economic Outlook, the IMF projected economic growth in the 12-country euro zone to increase this year by just 1.2 percent and then by 1.8 percent next year. Both estimates are lower than previous forecasts. In 2004, euro-zone countries logged growth of 2 percent.

Japan’s economy, which grew by 2.7 percent last year, is expected to expand by 2 percent this year and next. The forecast for this year is better than the IMF’s previous estimate in April, while the projection for 2006 is about the same.

China is expected to see its economy expand by a blistering 9 percent this year and 8.2 percent next year. Both projections are higher than earlier estimates. In 2004, China’s economy grew by 9.5 percent.