The International Monetary Fund's chief economist on Friday predicted better global economic growth in 2006, but warned the European Central Bank (ECB) to be careful about raising interest rates too quickly.
"The European recovery is still not in the bag," Raghuram Rajan said in an interview in Mumbai. "It's shown signs of recovery before, only to disappoint."
He said questions remained over how much German demand was driven by domestic factors and how well it would survive a US slowdown as the housing market of the world's largest economy shows signs of cooling.
But an improvement in Europe's economy and a pick-up in Asian growth would at least partly offset any US slippage.
"We see a shifting of global growth away from the United States to other countries. Whether it's enough is still for the jury to decide," Rajan said. "The jury is still out." Overall, he predicted a good year ahead, despite some reservations about the rising costs of energy and borrowing.
"2006 looks very promising. It looks like a strong year for the world economy. Growth this year looks even better than last year.
{{/usCountry}}"2006 looks very promising. It looks like a strong year for the world economy. Growth this year looks even better than last year.
{{/usCountry}}"However, the risks that we faced last year are still with us. Oil prices have started rising again. We have interest rates which have been on their way up, in part because of central bank tightening," he said. "The Bank of Japan has promised a tightening later this year."
Rajan said any move downward by the dollar in the medium term would depend on how much money kept pouring into dollar assets.
"We may see some adjustment," he said. "That's the great unknown, how long are investors going to support the US current account deficit?"
BIRD FLU THREAT
The spread of bird flu to Turkey had put its potential for human-to-human infection firmly on the radar screen, Rajan said.
"I think we are still are waiting and watching," he said. "If it does happen, it could be of enormous consequence to the world economy."
Asked about a recent trend of countries repaying IMF loans, Rajan said he believed there would always be a role for the IMF to play in monitoring domestic risks to the world economy.
"This has happened before, and somehow it seems countries do get themselves into trouble again, so I think it's a little bit early to write off the IMF."
"We must also see this as a good sign that countries are able after the help by the IMF to stand on their own two feet and repay the IMF. This is what everybody's been saying should happen, and it's happened, so I think this is a very good sign."