01/30/2008

News / IMF Sees Slowing World Economy in 2008

WASHINGTON (AP) — World economic growth will slow significantly in 2008 but the U.S., whose housing downturn is rattling global financial markets, will avoid recession, the International Monetary Fund forecast Tuesday.

The stimulus package being hashed out between Congress and the White House, along with the Federal Reserve's recent cut of a key interest rate, should provide a modest boost to U.S. economic growth by the middle of the year, IMF officials said.

"The five-year long global expansion has begun to moderate in response to the spreading effects of financial disruptions," Simon Johnson, economic counselor and director of the research department at the IMF, said during a press briefing.

The IMF sees world economic growth slowing to 4.1 percent this year, down from 4.9 percent in 2007. U.S. economic growth will slow to 1.5 percent in 2008, Johnson said, down from an estimated growth rate of 2.2 percent in 2007. The 2008 projection is lower than the IMF's October 2007 prediction of 1.9 percent.

Rising home foreclosures and falling home prices caused U.S. financial markets to drop steeply in recent months, as major banks such as Citigroup Inc. and Merrill Lynch & Co. Inc. have written down billions of dollars of securities that include bad home loans.

The disruptions have reverberated around the world as banks have cut back on lending and raised credit standards, leading to tighter credit markets.

Tuesday's IMF report was the second time the organization has cut its 2008 growth projection. Last July, the IMF estimated the world economy would grow 5.2 percent in 2008, but in October the estimate was reduced to 4.4 percent.

Johnson said that difficulties in the U.S. financial sector have impacted Europe's economy. Several of its major banks have also reduced the value of complex securities they hold that are tied to U.S. mortgages.

The IMF expects growth in the European Union to slow to 1.6 percent this year, down from an estimated 2.6 percent in 2007.

Asia and Latin America, meanwhile, will also see reduced growth in 2008, the IMF said, as their exports decline due to weaker economies in the United States and Europe.

The global impact of the U.S. slowdown indicates that the U.S. economy still exerts influence over the rest of the world, despite predictions that other countries are "decoupling," Johnson said.

Equities markets in the United States, Europe, and Asia fell steeply last week on fears the U.S. economy would slip into recession.

"Reports of decoupling have been greatly exaggerated," Johnson said.

China is forecast to continue its rapid growth, though at a reduced pace, with growth slowing from 11.4 percent in 2007 to 10 percent this year, the IMF said.

Africa, meanwhile, will grow more quickly in 2008, thanks to rising commodity prices and improved economic policies, Johnson said. Africa's economies will grow by 7 percent in 2008, up from 6 percent last year, the IMF projected.

The estimates were included in an update of the IMF's World Economic Outlook, which is issued twice a year. The next update will be issued in April.


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