India Warns That U.S. Economic Slowdown Could Hit Emerging Markets Hard

A slowdown in the U.S. may trigger a worldwide recession that if "disorderly" will hit emerging market economies hard, India's finance minister warned May 4. Palaniappan Chidambaram, speaking at the 39th annual meeting of the Asian Development Bank (ADB), said global economic growth continued to depend heavily on the U.S. economy.

"A possible slowdown in the US economy may trigger a worldwide recession," Chidambaram told delegates at the seminar on global payment imbalance in the high-tech southern Indian city of Hyderabad. He said fears of a recession were evident by global imbalances that were reflected in large mismatches in the current account, or trade balance, of many countries. The U.S. current account deficit was a record US$ 805 billion in 2005 or 6.4% of its gross domestic product and is expected to grow as oil prices soar which should prompt oil exporting countries to ensure the gap does not widen too far, he said.

He said the impact of a U.S. recession would be felt quickly in the currency markets, as the dollar may sharply lose value and lead the U.S. Federal Reserve to raise interest rates.

"In the asset market, these corrections will result in a sharp depreciation of the dollar and that could lead to a sharp drop in the demand for dollar assets and relocation of portfolio away from dollar assets. This could lead to a sharper rise in interest rates in the U.S.," he said.

Copyright Agence France-Presse, 2006

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