Massive US deficits, red-hot housing prices, and volatile energy markets could soon dampen American consumption and darken world growth forecasts, the International Monetary Fund's chief economist said in remarks released on Friday.
Raghuram Rajan said the global economy would likely expand by about 4.3 percent this year and again in 2006, but cautioned that "considerable" risks sobered the picture.
"The central concern has to be about consumption growth in the United States, which has been holding up the world economy," Rajan said in a speech dated October 25 but distributed by the IMF on Friday.
He warned high energy prices, if they feed inflation and inflationary expectations, could cause the US Federal Reserve to raise rates faster and further than now expected and lead to an abrupt fall in consumer spending.
"This would have several negative effects," he said higher interest rates could stunt house price growth and hinder investment at a time when more investment is desperately needed in low-income countries and emerging markets, he said.
"My greatest worry is not that US consumption will slow - it has to, because it is being fuelled by unsustainable forces," Rajan said. "My worry is that it will slow abruptly, taking away a major support from world growth before other supports are in place."
But new economic data released on Friday showed no sign of immediate US cooling. The Commerce Department said strong consumer spending propelled US economic growth to a robust 3.8 percent annual rate in the third quarter of 2005.
Rajan cited the US current account deficit - approaching 6.25 percent of gross domestic product and more than 1.5 percent of world GDP this year - as another key source of global instability.
"To finance it, the United States needs to pull in 70 percent of all global capital flows," he said, adding oil producing Middle Eastern countries were increasingly filling the gap as their surpluses eclipse emerging Asia's.
Rajan said the US current account gap was more than fully financed at present.
"From the evidence we have so far, foreign central banks do not appear to vary their purchases of US Treasuries in a systematic way with changes in the trade-weighted dollar," he said, but warned private investors could be scared away.
"The concern is that financing will become more difficult with consequences to US interest rates and the exchange rate precisely when other factors make the US slow and look an unattractive place to invest," Rajan said.
The United States has accused the IMF, a Washington-based multilateral body that acts as a global economic watchdog and seeks to mitigate financial crises, of pulling punches in its dealings with China.
In his remarks, Rajan acknowledged risks from China's foreign reserves build-up and said more currency flexibility - a key demand from the US Treasury, which says the yuan's relatively low value makes Chinese exports unfairly cheap - would benefit the country and help bridge world imbalances.
He defended the IMF's approach to the Asian giant.
"The fund has been discussing the need for greater exchange rate flexibility with China for some time, starting as early as 2000, long before others woke up to the growing global imbalances," he said. "Nevertheless, more action is needed."
Rajan said the yuan should allow the yuan, or renminbi, to appreciate more but warned a huge shift would "probably do much more harm than good."
He also gave a nod to US arguments that other developed countries, like Japan and European Union nations, need to overhaul their economies to grow faster and spur demand in order to bridge current imbalances.
Without delving into the specifics of current agriculture tariff talks plaguing the World Trade Organisation, Rajan said open world trade was critical, warning rising protectionism could potentially harm the entire world economy.
"We should continue with the process of reducing trade barriers, which means working toward an ambitious Doha round," he said.
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