Washington - The International Monetary Fund (IMF) cut its 2008 forecast for world growth on Tuesday, warning the global economy will deliver the weakest performance in five years as US-originated financial strains intensify.
The IMF said no country will entirely escape the fallout from a crisis in the US subprime mortgage market, where loans made to less creditworthy borrowers were packed into securities by Wall Street firms and sold around the world.
Defaults are soaring on the loans and no one has a firm estimate on eventual losses. Banks are continuing to write down billions of dollars in projected losses, raising fears they will be reluctant to lend, which would further crimp economic expansion.
"It is a significant slowdown. It is a global slowdown, without any question," IMF chief economist Simon Johnson told a media briefing. He would not say that the US would tip into a recession, but the IMF made it plain that it was bracing for more bad news.
China still booming
"The overall balance of risks to the global growth outlook is still tilted to the downside," the IMF said in an update to its semi-annual world economic outlook released in October 2007.
The organisation lowered its global 2008 growth projection to 4.1% from 4.4%.
This would be the weakest performance since 2003, when world growth came in at 3.6% percent, and reflects a marked slowdown from the 4.9% pace last year although emerging economies have held up so far and China has not faltered.
"The financial market strains originating in the US subprime sector... have intensified, while the recent steep sell-off in global equity markets was symptomatic of rising uncertainty," it said.
US slowing down
The IMF cut its US growth forecast for this year by 0.4 of a percentage point to 1.5% and lowered the eurozone projection by 0.5 of a percentage point to 1.6%.
European officials are trying to put some distance between themselves and the idea that a US slowdown necessarily means they too will suffer, as the IMF suggested will happen.
A member of the European Central Bank's governing council, Athanasios Orphanides, said on Tuesday that he foresaw only a modest impact in Europe while acknowledging that US performance was coming in worse than expected.
"But in Europe until this point in time, the impact does not appear to be large and the economy continues to grow at a satisfactory level," Orphanides said.
The IMF said financial upheaval "has reached a new phase - a phase where credit concerns now extend beyond the subprime sector" and will need careful watching for fear it infects the whole global economy.
Developing countries not untouched
"The main risk to the outlook for global growth is that the ongoing turmoil in financial markets would further reduce domestic demand in the advanced economies and create more significant spillovers into emerging market and developing economies," the IMF stated.
The numbers were based on new purchasing power parity data, previously announced, that trim 2005 to 2008 growth estimates by around a half percentage point a year relative to the IMF figures published in October.
The IMF lowered Japan's forecast by 0.2 of a percentage point to 1.5%, but China's economy was still expected to expand by a respectable 10% this year.
"Despite some slowing of export growth, emerging market and developing economies have thus far continued to expand strongly, led by China and India," the IMF noted.
The US Federal Reserve has slashed interest rates since mid-September, including an emergency cut of three-quarters of a percentage point last week as global stock markets plunged. The European Central Bank has kept rates on hold, but the Bank of England has cut and is expected to ease again.
Taking the edge off
Johnson praised the American central bank's actions in cutting interest rates 1.75 percentage points since September and said that would bolster the country's economy, especially in combination with a proposed fiscal stimulus package.
"The key point is that monetary policy remains effective," Johnson said. "As the Fed has cut interest rates significantly since the summer, this is going to have an effect on the real economy."
He added that a package of fiscal measures, still under negotiation between Congress and the Bush administration, will complement the lower interest rates and was necessary.
"There is some risk management reasons for using the fiscal stimulus for taking the edge off the potential downward spiral," Johnson said. "I think that this is actually a good combination of polices for the US in the current circumstances."
- Reuters