Tue, May 20, 2003 - Page 10 News List

IMF warns of deflation in Taiwan ...

TOUGH ASSESSMENT The organization said that cheap imports from China were at least partly to blame for the continuing decline in prices here and in Hong Kong


Taiwan is at high risk of deflation and Japan, Hong Kong and Germany are vulnerable to an accelerating pace of price declines, the IMF warned on Sunday in a blunt assessment.

The report found a low chance of deflation in the US, but added that there are "considerable uncertainties" in that outlook.

"There has been a clear increase in the vulnerability to deflation for a number of industrial and emerging market economies," the IMF said.

Low post-war inflation rates, the bursting of an equity price bubble, rising banking sector stresses in some economies and declining credit growth are to blame, the IMF concluded.

The study, put together by a special task force overseen by IMF chief economist Kenneth Rogoff, comes at a time of increased worries about deflation around the world.

The US Federal Reserve has recently raised concerns about deflation in the US and fears about deflation in Germany's stagnant economy have been on the rise.

The IMF report warned that deflation, defined as a sustained decline in an aggregate measure of prices, is seldom benign and is difficult to anticipate.

The situation in Asian economies, some already struggling with falling prices, could get worse, the report said. In Japan there is a high risk that deflation could accelerate if economic growth remains flat and unemployment rates rise.

Partly due to cheap imports from China, Taiwan and Hong Kong may also face a more difficult price picture. The IMF said it had insufficient evidence to say China is exporting deflation.

The US made it into the low risk category.

"The lower risk reflects an expected narrowing in the output gap, relief provided by a recent depreciation of the US dollar, the resilience in the financial sector, the availability of policy stimulus and the explicit willingness of policy makers to take pre-emptory action," the IMF said.

Nevertheless, there are considerable uncertainties -- related to equity price declines still in the pipeline, excess capacity in several major sectors and the impact of security and geopolitical concerns, it said.

China is also in the low risk category with strong economic growth and policy stimulus likely to contain deflation, the IMF said. But its large pool of under-utilized labor and excess capacity in many sectors may pose a problem.

Several other emerging market economies also fit into the low but not minimal risk category. These include Korea, India, Mexico, Poland and Thailand.

There is a "considerable" probability Germany will face deflation over the next year if economic growth meets projections of 0.5 percent this year, the IMF said. If the economy contracts the risks are even higher.

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