WASHINGTON (AFP) — The global economy faces "considerable challenges" in the shape of a slowing US economy, financial market turmoil and higher inflation, US Treasury Secretary Henry Paulson said Saturday.
Paulson, addressing the spring meeting of the International Monetary and Financial Committee, said global growth had been favorable in past years but circumstances had now changed in the fallout from the US home loan crisis.
"2008 will be a more difficult year, with headwinds coming from adjustments in the US economy, financial market stress, higher commodity prices, and higher than desirable inflation," Paulson said, according to the text of his address.
"Downside risks will vary ... but no economy is entirely immune from global forces."
Paulson said that after several years of "what, in retrospect, was unsustainable home price appreciation, the US economy is undergoing a significant housing correction."
The fallout puts all the risks on the downside and the US authorities have responded with a series of measures, including increased spending, to cushion the blow, he said.
"It took time to build up recent excesses and it will take time to work through the consequences. We must expect more bumps in the road," he said, citing the correction in the markets and reassessment of risk since August.
Paulson said there has been progress on increasing disclosure and improving risk and capital management in the financial sector, noting US government and Financial Stability Forum (FSF) measures.
On Friday, the Group of Seven industrialized nations meeting here strongly backed an FSF package of reforms and called for the banks to "fully and promptly" state their risk exposure due to the current financial market turmoil within 100 days.
Paulson said the IMF, as a member of the FSF, has an important role "to play in providing analytic support and conducting financial surveillance of its member countries."
Paulson said the IMF itself "must reform to retain its relevance and legitimacy," citing the need to adpat to "rapid technological change, the rise of dynamic emerging market economies and the increasing internationalization of financial markets."
Specifically, he called for the IMF to "sharpen its focus on" exchange rate surveillance, "openness to international investment, particularly meeting policy challenges posed by sovereign wealth funds and supporting global financial market stability."
The United States has been a strong critic of countries which manage their currencies closely -- such as China -- and Paulson pointedly said "strengthening implementation of this core mandate is integral to IMF legitimacy; insufficient progress would put success of the broader modernization effort at risk."
The treasury secretary reiterated the US commitment to free trade and getting a new World Trade Organization liberalization deal but noted also that "a significant contribution by the advanced developing countries is critical to (its) success."
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