The International Monetary Fund (IMF) has warned that the continued expansion of the global economy will slow down due to the recent financial turmoil.
"With financial markets around the world now being affected by the fallout from the US sub prime mortgage difficulties, a broader economic slowdown cannot be ruled out," the IMF said in the analytical chapters of its World Economic Outlook released on Wednesday in advance of the Oct 17 publication of the forecast.
The global credit squeeze would test the ability of the global economy to continue expanding at recent rates, the IMF said, adding that there was plenty of evidence that the global economy remained durable.
But the Washington-based agency also warned policymakers should not take for granted that the economic stability would continue.
"At the same time, until this summer, financial conditions have been generally benign and private capital flows have been relatively stable," said the report. "But it would be unwise to assume that the present expansion will continue indefinitely."
"The recent period of financial turbulence, if anything, has been a reminder of the shocks (negative and positive) that can occur and spread in ways not fully anticipated," the report added.
"The global expansion should continue, albeit at a somewhat slower pace," Simon Johnson, the IMF's chief economist, said at a news conference.
"This resilience in large part reflects the growing importance of emerging markets in the global economy and in these countries we expect expansions to remain broadly on track," he told reporters.
"Nevertheless, short-term downside risks have clearly risen," he said, adding that the rapidity with which the credit crisis in the US spread to other countries demonstrates that the interconnections between different kinds of financial institutions and between countries are becoming more complex and "when sparks fly, they fly quite a long way and they jump over firebreaks".
He also said it was too early for the IMF to recommend steps that countries should take to ease tighter credit conditions.
"We don't know if more regulation or less regulation or the same regulation is going to be the answer," he said. "We are still in the stage of waiting for these events to play themselves out fully and understanding how it happened and what are the implications."
The IMF has said it will lower its forecast for the global economic growth for 2008, particularly for the US due to the recent financial turmoil.
In a July report, the IMF revised upward its forecast for global growth in 2007 to 5.2 per cent, compared to the 4.9 per cent pace previously estimated. It also expects the world economy to expand 5.2 per cent in 2008, 0.3 percentage points higher than projected in April 2007.
But some media quoted persons with access to the IMF as saying that the fund now expects global economic growth of 4.8 percent for next year.
The IMF will also cut its growth forecast for the US to 1.9 per cent from 2.8 per cent previously, and for Canada to 2.3 per cent from the earlier 2.8 per cent. The euro zone is expected to post a growth of 2.1 percent in 2008, down from the 2.5 per cent forecast earlier.