GLOBAL economic growth will slump to 3.7 per cent this year from near 5 per cent in 2007. But China, India and other emerging economies will continue to expand fast enough to limit the impact of falling growth in crisis-hit advanced nations, the International Monetary Fund says in its World Economic Outlook (WEO) released yesterday.
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However, the risk of ‘global recession’ is growing and policy-makers should start making contingency plans now for a severe downturn, it warns. The report comes on the heels of another major IMF report on Tuesday, which said risks to the stability of the international financial system remain ‘elevated’ in the wake of the US sub-prime mortgage crisis.
The two reports will provide a sombre backdrop to tomorrow’s scheduled meeting of G-7 finance ministers and central bank governors in Washington, where policy responses to the financial and economic crisis will be discussed.
‘The US economy will tip into a mild recession in 2008 as a result of mutually reinforcing cycles in housing and financial markets, before starting a modest recovery in 2009 as balance sheet problems in financial institutions are slowly resolved,’ the IMF suggests in its latest report.
‘Activity in western Europe is also projected to slow to well below potential, owing to trade spill- overs, financial strains and negative housing cycles in some countries.’ it says.
The report projects that US real GDP will expand just 0.5 per cent this year, crumbling from 2.2 per cent in 2007 and 2.9 per cent in 2006. US growth rate is tipped to recover only modestly to 0.6 per cent next year. Japan’s growth is seen at 1.4 per cent this year, down from 2.1 per cent in 2007, and 1.5 per cent next year.
The euro area as a whole should grow 1.4 per cent this year, down from 2.6 per cent in 2007, but slow further to 1.2 per cent growth in 2009.
In contrast to the growth slowdown in advanced nations, ‘growth in emerging and developing economies is expected to ease modestly but remain robust in both 2008 and 2009′, the IMF predicts. ‘The slowdown reflects efforts to prevent overheating in some countries as well as trade and financial spillovers and some moderation in commodity prices.’ it says.
It warns that ‘the overall balance of risks to the short-term global growth outlook remains tilted to the downside’. IMF staff now see a ‘25 per cent chance that global growth will drop to 3 per cent or less in 2008 and 2009 - equivalent to a global recession’.
The prospect of global recession has not been even mentioned in previous issues of the bi-annual WEO.
‘The greatest risk comes from still-unfolding events in financial markets,’ the latest report says. It cites in particular ‘the potential for deep losses on structured credits related to the US sub-prime mortgage market and other sectors to seriously impair financial-system balance sheets and to cause the credit squeeze to mutate into a full-blown credit crunch’.
Interaction between ‘negative financial shocks and domestic demand, particularly through the housing market, remains a concern for the US and to a lesser degree for western Europe and other advanced economies’.
In the event of a severe global downturn, ‘there would be a case for providing temporary fiscal support in a range of countries that have made good progress in recent years in securing sound fiscal positions,’ the IMF says.
By ANTHONY ROWLEY
IN TOKYO
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