U.S. Markets closed

IMF chief economist sees overreaction in markets to oil, China

By Andy Bruce and William Schomberg

LONDON (Reuters) - Global financial markets seem to be overreacting to falling oil prices and the risk of a sharp downturn in China's economy, the chief economist of the International Monetary Fund said on Tuesday.

Speaking after the IMF cut its global growth forecasts for the third time in less than a year, Maurice Obstfeld also said it was critical that China is clear about its overall economic strategy, including its currency.

"It's not a stretch to suggest that (markets) may be reacting very strongly to rather small bits of evidence in an environment of volatility and risk aversion," Obstfeld said at a news conference.

"The oil price puts stresses on oil exporters... but there is a silver lining for consumers worldwide, so it's not an unmitigated negative."

Oil prices slipped to their lowest level since 2003 earlier on Tuesday, while data showed China's economy grew at its weakest pace in a quarter of a century last year.

Obstfeld said China faced further downside risks although recent data from the world's No.2 economy has been in line with the IMF's expectations.

But its outlook would depend on how well China's government manages the rebalancing of its economy.

"Clear communication of an overall policy strategy including with respect to the yuan's exchange rate is critical both for domestic stability and stability abroad," Obstfeld said.

Deflationary pressures clearly remain in Europe, Obstfeld said, noting that the European Central Bank has said it stands ready to take further action, such as additional quantitative easing.

"So we would anticipate that that happens as data comes in," he said.

(Reporting by Andy Bruce and William Schomberg; editing by Sarah Young)