Global Growth To Be Weakest In 5 Years: IMF

Source : The Straits Times, Jan 30, 2008

WASHINGTON - 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.

It warned that the global economy will deliver the weakest performance in five years as US-originated financial strains intensify.

The global economy is poised to grow 4.1 per cent 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 per cent, 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 sub-prime 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.

'Tilted to the downside'
'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 sub-prime, or risky, mortgages rippled into the financial markets in August, is the 'epicentre' 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 per cent this year compared with 2007.

That would follow an estimated 2007 fourth-quarter growth pace of 2.6 per cent 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 on Friday, but was delayed because of rapidly changing economic circumstances.

Slowdown in Q4 US growth
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 per cent 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 per cent as growth has been dampened by a tightening in building standards and sentiment has faltered.

China, India see strong growth
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 per cent pace, 0.2 per cent lower than the prior estimate.

In China, growth was forecast to ease to 10 per cent this year from an estimated 11.4 per cent to 10 per cent, 'which should help alleviate overheating concerns,' the Fund said.

The IMF warned that emerging market economies face elevated risks in the financial turmoil.

Emerging markets
'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 defence' in the battle against the financial disruptions, he said.

Mr 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 on Tuesday and Wednesday. - AFP