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With US in crisis, global economy in peril: IMF

The global economic outlook is increasingly grim with the United States mired in a recession, according to an IMF forecast.
AP | By Jeannine Aversa, Washington
UPDATED ON APR 10, 2008 01:52 AM IST

The world economy will slow sharply this year, according to an International Monetary Fund forecast, with the United States sliding into a recession amid housing, credit and financial slumps.

The International Monetary Fund, in a World Economic Outlook released on Wednesday, slashed growth projections for the United States, the epicenter of the woes, and the global economy as a whole. Even so, growth in China and India will remain strong, even as the two nations are expected to post lower growth rates in 2009. Economic growth in the United States is expected to slow to a crawl of just 0.5 per cent this year, which would mark the worst pace in 17 years, when the country last suffered through a recession, the global finance body said. The United States will not fare much better next year; the IMF projected the U.S. economy will grow by a feeble 0.6 percent in 2009, when measured by an annual average. "The US economy will tip into a mild recession in 2008 as the result of mutually reinforcing cycles in the housing and financial markets," the IMF said.

Looking at other countries, the IMF trimmed its projection for Germany, with economic growth slowing to 1.4 percent this year and weakening to 1 per cent in 2009. In Britain, growth will slow to 1.6 per cent this year and next. France also will see growth decelerate to 1.4 percent this year and 1.2 percent next year. Japan's economy will expand by 1.4 per cent this year and 1.5 percent next year, which would mark a loss of momentum from last year. Canada's growth would slow to 1.3 percent this year and pick up slightly to 1.9 per cent next year.

Global powerhouse China, which barreled ahead at an 11.4 percent pace last year, would see growth moderate to 9.3 percent this year and then strengthen a bit to 9.5 per cent next year. India, which grew by a blistering 9.2 per cent last year, is expected to grow by 7.9 per cent this year and 8 percent next year. Russia, which logged growth of 8.1 per cent last year, will see growth moderate to 6.8 per cent this year and then 6.3 percent next year. While the IMF is worried about the dangers of weakening global economic growth, it also expressed concern about the potential for inflation to heat up around the world, given sharp increases in energy and other commodity prices. "Risks related to inflationary pressures have risen," the fund said.

Many private economists and members of the US public believe the country has already fallen into its first recession since 2001. For the first time, Federal Reserve Chairman Ben Bernanke acknowledged last week that a recession was possible. An increasing number of analysts think the US economy, which grew by 2.2 per cent in 2007, started shrinking in the first three months of this year and is still contracting. Under one rough rule, if the economy contracts for six straight months it is considered to be in a recession. A panel of experts at the National Bureau of Economic Research that determines when US recessions begin and end, however, uses a broader definition, taking into account income, employment and other barometers.

When the IMF projected US economic growth using another measure comparing activity in the fourth quarter of one year with the previous year the country's economy would actually shrink 0.7 per cent this year, said the IMF's chief economist Simon Johnson. By that measure, the economy would grow by a still lackluster 1.6 per cent in 2009, he added.

To limit the damage, the Federal Reserve has been slashing interest rates since last September and has taken a number of extraordinary measures to avert a financial meltdown, which would have dire consequences for the U.S. economy.

"The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression," the IMF declared.

Problems started in the United States with risky "subprime" mortgages made to people with blemished credit and quickly spread into other areas, hitting more creditworthy borrowers. Foreclosures in the U.S. hit record highs and financial companies racked up multibillion-dollar losses as mortgage-backed investments soured with the collapse of the U.S. housing market.

The fallout gripped investors on Wall Street and in other countries, creating a panicky atmosphere that threatened to paralyze financial markets in the United States and beyond. Against that backdrop, the IMF now expects the world economy, which grew by a hardy 4.9 per cent last year, to lose considerable momentum. The fund is projecting the global economy to grow by 3.7 per cent this year and 3.8 per cent next year.

"The global expansion is losing speed in the face of a major financial crisis," the IMF said.

There is a risk that things could turn worse, it cautioned. "The IMF now sees a 25 percent chance that global growth will drop to 3 per cent or less in 2008 and 2009 equivalent to a global recession," the fund said. "The greatest risk comes from the still-unfolding events in financial markets, particularly the potential for deep losses" on complex investments linked to the U.S. subprime mortgage market, the IMF said.

House prices in the United States will continue to drop, with declines this year in the range of 14 to 20 per cent, Johnson said.

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