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An aging population threatens expansion

Protectionism and aging populations pose the biggest long-term threats to a golden era of global economic growth that is on course to be the longest period of expansion since the late 1960s and early 1970s, the IMF said on Wednesday.

In its half-yearly health check, the IMF said there were unlikely to be knock-on effects from the housing-induced slowdown in the US and that global growth would be 4.9 percent this year and next, after 5.4 percent last year.

"As long as investment remains positive we can sustain global growth at 5 percent for some years to come," said Simon Johnson, the IMF's economic counsellor.

The IMF has revised down its forecast for US growth next year by 0.7 points to 2.2 percent, but said the stronger performance of India, Japan and Europe meant its forecast for the global economy had remained unchanged since its last World Economic Outlook (WEO) was published in September.

Johnson said the risks to the outlook also appeared less threatening than they did last autumn, with oil prices down from a peak of almost US$80 a barrel and some evidence that the global imbalances -- a large current account deficit in the US financed by capital inflows from Asia -- had eased.

"All of you have heard or read about the slumping US housing market, problems in sub-prime mortgages, bankruptcies and foreclosures, and more recently, softening business investment -- much of the news has not been good," Johnson said at a press conference to launch the WEO.

"And you might ask if the US sneezes, won't the rest of the world catch a cold? This is a key risk to the outlook, and a timely question that we have looked at extensively in this report. Our bottom line view is that while the US may have sneezed, it appears to be a mild sneeze thus far, and not likely to spread," he said.

The IMF said that last year saw the strongest performance by the eurozone in six years, and India was now challenging China as the world's fastest-growing developing economy. China's growth of 10.7 percent last year is expected to ease only slightly to 10 percent this year, while India is forecast to grow by 8.4 percent after 9.2 percent last year.

"In Africa, the near-term outlook remains very positive, against the backdrop of strong global growth, continued progress in achieving macro-economic stability and rising oil production in a number of countries," Johnson said.

The IMF said it still believed that most of the risks to its forecast were on the downside, citing the potential for a sharper slowdown in the US if the housing sector continued to deteriorate; the risk of a deeper and more sustained retrenchment from risky assets if financial markets remained volatile; the possibility that inflation pressures could revive, particularly in the event of another jump in oil prices; and the low probability but high risk of a disorderly unwinding of large global imbalances.

Johnson said the IMF was untroubled by the bout of jitters in the global financial markets two months ago, which saw pressure on the dollar and higher interest rates for riskier assets.

"Others may worry that the recent bout of financial market volatility may begin to undermine the strong global growth that we envisage. But I don't believe that the financial tail is about to wag the economic dog," Johnson said.

The IMF said developed countries should take advantage of the "superlative" growth to put their finances in order, because they would face the impact of aging populations on pension and healthcare costs. Reforms would be more difficult the longer they were delayed.

"Global integration and competition have brought tremendous gains but carry distributional consequences that need to be addressed more effectively," Johnson said. "If we don't, the danger is renewed protectionism which could jeopardize many of the gains that many of us now seem to take for granted."
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