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IMF Warns Metal Prices Likely to Plummet

The International Monetary Fund, which on September 19 and 20 holds its annual meeting in Singapore, Wednesday released portions of its economic outlook at a briefing in Washington. While the IMF sees impressive overall growth continuing, it believes surging commodity prices will fall back.

Raghuram Rajan, the IMF's outgoing chief economist, says the world economy is in good shape but faces increasing risks of slowdown. In April the IMF slightly boosted its projections of world growth to 4.9 percent this year and 4.7 percent in 2007. In advance of its updated projections being released in two weeks, Rajan is optimistic.

"We now are in the fourth year of very strong world growth, growth that has been maintained in the face of headwinds, such as higher commodities prices, oil prices, and so on," said Raghuram Rajan.

Rajan, who later this year will return to his teaching position at the University of Chicago, says the prices of industrial metals have risen even faster than oil, which has more than doubled in the past three years. Metal prices, particularly copper, reached multi-year highs earlier this year before falling back sharply in May. Since then they have recovered most of their losses. Rajan believes metals prices are likely to fall.

"Our models, as well as futures prices, suggest that metals prices are likely to decline in the future," he said. "Non-oil, commodity dependent economies should anticipate this risk by being more cautious on expenditures that are hard to reverse, such as public sector salaries, and instead focus on expenditures that help build diversified productive capacity for the future."

This is a time of year when several organizations update their economic forecasts. Earlier this week the Paris-based Organization for Economic Cooperation and Development (OECD) repeated its earlier prediction that the US economy will expand by 3.6 percent this year, while the 12 countries in the euro currency zone will grow by 2.7 percent, an upward revision from the 2.2 percent forecast in April. Japan's economy is projected to slow slightly to 2.5 percent this year while China continues to grow at more than nine percent annual rate.