Speaking in Frankfurt, Germany on Tuesday, International Monetary Fund First Deputy Managing Director John Lipsky speculated that the global economic slowdown would worsen in the second half of 2008, but expected recovery to come in the following year.

"The recovery of global economic activity in 2009 would be driven by the unwinding of the effects of the more the 50% increase in oil prices and the bottoming out of the U.S. housing sector," Lipsky said.

"This would be supported by continued robust domestic demand in many emerging economies, which have benefited from rapid integration with the global economy and have been affected to a much smaller extent by the financial turmoil."

However, despite the deepening slowdown expected, Lipsky emphasized that the central banks in Japan, the euro zone and the U.S. could all "afford" to keep rates on hold.

"Weakening domestic demand, increasing output gaps and sluggish labour markets should limit pressure on underlying inflation. Moreover, the recent sharp decline in oil prices should help alleviate short-term pressure on headline inflation. Thus, policy makers can afford to keep rates on hold in the face of elevated headline inflation, while watching closely for signs of easing price pressure that would permit a more accommodative stance in economies with relatively high real interest rates."

By Todd Wailoo
©CEP News Ltd. 2008