GLOBAL GROWTH

IMF: lower global growth in 2008

Tuesday, January 29, 2008

The International Monetary Fund has announced a lower global growth in 2008 due to the subprime crisis and banks' inability to recover from it. The USA and the Eurozone could be hit the hardest by this slowdown. (Story: A. Dupuis)

The International Monetary Fund on Tuesday lowered its 2008 global growth outlook, citing a US slowdown and financial market turmoil that have put emerging economies at risk.
  
The global economy is poised to grow 4.1 percent this year, down 0.3 percentage points from a previous estimate, the IMF report said.
  
The US economy, the world's largest, will expand by 1.5 percent, 0.4 points lower, the IMF said in an update of its twice-yearly World Economic Outlook.
  
"The financial market strains originating in the US subprime sector -- and associated losses on bank balance sheets -- have intensified, while the recent steep sell-off in global equity markets was symptomatic of rising uncertainty," the IMF said.
  
"The overall balance of risks to the global growth outlook is still tilted to the downside."
  
The main risk is that the ongoing financial market turmoil would further reduce activity in the advanced economies and "create more significant spillovers into emerging market and developing economies."
  
The United States, where the crisis in subprime, or risky, mortgages rippled into the financial markets in August, is the "epicenter" of the global slowdown, the Fund said.
  
To illustrate the momentum of the growth slowdown in the US economy, the Fund predicted fourth-quarter year-on-year expansion of 0.8 percent this year compared with 2007. That would follow an estimated 2007 fourth-quarter growth pace of 2.6 percent from the same period in 2006.
  
The Fund already had lowered its 2008 global growth estimates in October from a July forecast. This latest update of the World Economic Outlook (WEO) initially had been scheduled to be published Friday, but was delayed because of rapidly changing economic circumstances.
  
A notable slowdown in US economic growth in the fourth quarter primarily was seen in indicators showing weakening manufacturing, housing, employment and consumer spending.
  
Growth has slowed in western Europe and confidence generally has deteriorated. The IMF predicted growth of 1.6 percent in the 15-nation eurozone this year, down 0.5 percentage point from the previous estimate.
  
In Japan, growth was seen slowing by 0.2 percentage point to 1.5 percent as growth has been dampened by a tightening in building standards and sentiment has faltered.
  
China and India continued to lead the robust expansion of the emerging market and developing economies but growth was expected to decelerate in those economies amid the overall slowdown to a 6.9 percent pace, 0.2 percent lower than the prior estimate.
  
In China, growth was forecast to ease to 10 percent this year from an estimated 11.4 percent to 10 percent, "which should help alleviate overheating concerns," the Fund said.
  
The IMF warned that emerging market economies face elevated risks in the financial turmoil.
  
"Emerging market countries that are reliant on capital inflows could be directly affected, although strong momentum from domestic demand in countries -- such as China and India -- provides some upside potential," Simon Johnson, IMF research director, said at a news conference.
  
Central banks in the advanced economies are the "first line of defense" in the battle against the financial disruptions, he said.
  
Johnson deemed "appropriate" the European Central Bank's policy of holding interest rates unchanged, challenged by certain eurozone countries, as well as the repeated rate cuts by the Federal Reserve, which is considering a monetary move Tuesday and Wednesday.

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