WASHINGTON - THE International Monetary Fund (IMF) on Wednesday slashed its 2008 global economic forecast, warning that turbulence stemming from a crisis in the US housing sector could crimp growth worldwide.
The world economy is expected to expand 4.8 per cent next year after a 5.2 per cent pace projected for 2007, the IMF said in its twice-yearly World Economic Outlook (WEO) report.The downgrade comes in the wake of turmoil in global financial markets in August that prompted the IMF to reverse course after an unusual update in July in which it raised its 2008 global growth forecast to 5.2 per cent.
The greatest threat to the world economy is the financial market unrest stemming from the high-risk US subprime mortgage sector, where loans were given home buyers with poor credit histories.
This has affected banks and lenders worldwide and made credit conditions more difficult, said the report, released ahead of the annual meetings of the IMF and the World Bank that open on Saturday in Washington.
'Risks to the outlook lie firmly on the downside, centring around the concern that financial market strains could continue and trigger a more pronounced global slowdown,' the IMF said.
'Thus, the immediate task for policymakers is to restore more normal financial market conditions and safeguard the continued expansion of activity.'
G7 meeting
The financial turmoil will figure high on the agenda of a meeting of Group of Seven finance ministers in Washington Friday, US Treasury Under Secretary David McCormick said.
'The issues raised by the recent turmoil are complex and require careful analysis,' Mr McCormick said. 'We must undertake this work quickly but we cannot rush to judgment.'
Attending the G7 meeting will be finance ministers and central bank chiefs of the seven leading industrialized nations: the United States, Japan, Germany, France, Britain, Italy and Canada.
The IMF report said that, despite the heightened risks, the global economy is poised for 'solid' growth in 2008.
'The expansion is projected to remain above the long-term trend, notwithstanding recent financial market turbulence, with emerging market and developing countries leading the way,' the IMF said, citing mainly low inflation levels and robust gains in trade volumes worldwide.
In a July update of the April WEO, the IMF had raised its global growth forecasts for both 2007 and 2008 by a 0.3 percentage point to 5.2 per cent.
The latest WEO holds this year's forecast at 5.2 per cent. But the IMF reversed course and downgraded its 2008 outlook following the financial market turmoil of August.
Credit market deteriorated
'Global credit market conditions have deteriorated sharply since late July as a repricing of credit risk sparked increased volatility and a broad loss of market liquidity,' said the 185-nation Fund, whose mission is to promote global financial stability.
The IMF said it partly based its 2008 global forecast on the assumption that this year the US Federal Reserve would cut interest rates by a further half point and that the European Central Bank and the Bank of Japan would refrain from raising rates.
In September the Fed, in its first rate cut in four years, lowered its target for the federal funds rate by a half point to 4.75 per cent to ease a credit crunch that had spread worldwide in August, pummelling stock markets.
The IMF said the world's largest economy is facing a rising risk of recession due to a severe, two-year downturn in the housing sector that could crimp consumer spending.
Lower US growth
The Fund shaved its US economic growth forecast by 0.1 point to 1.9 per cent for this year and by a sharper 0.9 point to 1.9 per cent for 2008.
Growth in Japan, the second-biggest economy, was marked down to 2.0 per cent in 2007 and 1.7 per cent in 2008, 0.6 percentage point and 0.3 percentage point lower, respectively, than the July estimates, reflecting in part a slightly stronger yen.
In the 13-nation eurozone, growth was reduced 0.4 point to 2.1 per cent as a result of the delayed effects of euro appreciation, trade spillovers from the US and more difficult financing conditions.
China to set pace
By contrast, 'growth is expected to remain very strong' among emerging market and developing countries, the IMF said, with China continuing to set the pace, at 10 per cent in 2008, about 0.5 percentage points lower than in the July update. -- AFP
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