World economic Outlook

• Author: Subir Lall
• Position: IMF Research Department
• Pages: 49-53

Page 49

Global growth will decelerate in 2008, led by a sharp slowdown in the United States, amid a housing correction and a financial crisis that has quickly spread from the U.S. subprime sector to core parts of the financial system, the IMF says in its latest World Economic Outlook (WEO).

Page 52

Citing the unfolding financial market turmoil as the biggest downside risk to the global economy, the April 2008 report said the IMF expects world growth to slow to 3.7 percent in 2008-0.5 percentage point lower than what was forecast in the January 2008 WEO update.

Further, world growth would achieve little pickup in 2009, and there is a 25 percent chance that the global economy will record growth of 3 percent or less in 2008 and 2009, equivalent to a global recession, according to the forecast, released on April 9.

Highlighting high commodity prices as another downside risk, IMF Chief Economist Simon Johnson said that "the effect of the financial turmoil in the United States has been to lower the prospects of growth, but, somewhat paradoxically, it has also increased oil prices, metal prices, and, of course, food prices."

Johnson pointed out that "the increases in commodity prices create severe inflationary pressures in many countries, and they make it much harder for monetary and fiscal policy to manage this part of the global business cycle."

Gloomy prospects

Blaming the twin forces of deteriorating financial market conditions and the continuing correction in the U.S. housing market, the IMF predicts that the United States will slip into a "mild recession" in 2008, from which it will recover only modestly in 2009. This reflects the time it will take for financial institutions and households to resolve their balance sheet problems. The slowing of activity is reflected in weakening employment, consumption, and other indicators.

The report has sharply marked down its U.S. forecast for 2008 to 0.5 percent- 1 percentage point lower than what was forecast in January 2008 and down from a 2.2 percent growth rate in 2007 (see table).

The ongoing financial crisis has led to persistent liquidity shortages, pressure on the capital of banks and other financial institutions, increasing credit risks, and sharply falling prices of mortgage-related and other structured securities, as well as of equities, the report said. The IMF...