The global banking and finance industry expects robust economic growth in 2007, but also sees “anxiety amidst prosperity” due to financial market turmoil and an uncertain US outlook, a report showed on Wednesday.
The Institute of International Finance (IIF), a grouping of major global banks and finance firms, said some of the optimism on the economic outlook is tempered by growing risks. “Global growth continues to be strong and is likely to be close to 5% this year,” IIF said in a report delivered to the International Monetary Fund (IMF) and the World Bank ahead of their semi-annual meetings.
The report said the developing world is sharing in the expansion amid strong investment in these countries. “Net private capital flows to emerging markets are running at a record annual rate of around $500 billion (Rs21.5 lakh crore),” it added.
But IIF managing director Charles Dallara said his group’s research suggests “growing vulnerabilities to the outlook for global growth”.
“Geopolitical developments and persistent global imbalances cloud the future, with the latter raising the prospects of protectionism and disorderly adjustment,” he said.
“In financial markets, events earlier this year involving a spike in volatility and downward adjustments in global asset prices reflected in part concerns about the outlook for the US economy, sparked by deterioration in the subprime mortgage sector. These events may also have signalled prospects of a return of risk aversion, particularly as the current high levels of international liquidity recede.”
Dallara cited “an unusual sense of unease and anxiety amidst prosperity”.
In his letter, he called for the international organizations to “build on current activities and engage more deeply with one another on these issues and for the IMF to reassert the leadership in our collective efforts to underpin global financial stability”. He said finance ministers, central bank governors and IMF should “engage in an extensive dialogue with private finance to secure the stability of the global financial system”.
Such meetings may be useful since the global financial system has become more complex due to the rise of market derivatives and hedge funds that move across borders.
Dallara suggested that the banking industry leaders meet IMF and other global leaders, starting at the October annual meeting of the international organization.
“These meetings at senior levels could identify common interests in areas of financial stability and market efficiency and enhance mutual understanding of critical developments in financial markets,” the IIF said.