–Disturbed By Rate Of Export Deceleration In China, Korea
–IIF Chief Econ: Fiscal Effect On US Econ Not In Future, See Impact Now

By Brai Odion-Esene

WASHINGTON (MNI) – While it was widely forecast that pace of
economic activity in fast-growing emerging market economies would ease
this year, the rate at which countries like China are slowing down is
more substantial than expected, the head of the Institute of
International Finance said Thursday.

Meanwhile, the United States “is not far from a time when the
expectation for credible fiscal policy will be upon us,” IIF Managing
Director Charles Dallara said during a press briefing.

The head of the Washington-based banking group said he had just
returned from a trip to China and South Korea, and that he was disturbed
to see “how quickly the export deceleration is taking place there.”

“It’s disturbing,” he emphasized, adding authorities here in the
United States have yet to fully grasp the severity of the situation.

“It has not yet been fully absorbed, in my view, in economic
policymaking in this country,” Dallara said. “I do think emerging
markets are suffering a more substantial downdraft in overall economic
activity than hardly anyone had forecast in the beginning of this year.”

Asked by MNI to comment specifically on the stuttering recovery in
the U.S., despite aggressive easing measures from the Federal Reserve,
IIF Chief Economist Phillip Suttle, who was also present at the
briefing, cited the fiscal cliff and cautioned against viewing it — and
the devastating impact the tax hikes and spending cuts could have — as
a future event.

“It’s been with us for 18 months at least,” he said, and the IIF
expects U.S. fiscal policy to tighten by about 1.25 percentage points of
GDP this year alone.

“So already this year we have a major headwind coming from fiscal
tightening,” Suttle said.

He predicted that the U.S. economy in 2012, on an annual basis,
will grow by about 2%. However, with fiscal policy subtracting 1.25
percentage points, “you could say the private sector has been growing at
about 3.25%.”

While not an impressive rate of growth, it is not a “disaster,”
Suttle continued, and underlines that “the headwinds from fiscal policy
are very much with us now and will probably intensify.”

The near-term pain from fiscal adjustment can be moderated, Dallara
said, it is action on a credible medium-term plan — from Congress or
the administration — that is lacking.

Given the country’s high unemployment rate, and the risk of a
rating agency action — “they are not going to wait around forever for
the U.S. to get its act together” — market sentiment towards the U.S.
could shift suddenly towards high levels of anxiety, Dallara warned.

“The United States is not Greece,” he said, “but to think we are
immune from a sudden reversal of market sentiment … there is a risk
here if action is not taken, both on the fiscal cliff and the medium
term fiscal framework.”

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,M$Q$$$,M$A$$$,MI$$$$,MI$$$$,MFU$$$,M$$CR$,MGU$$$]