IMF: With US in crisis, global economy in peril

The global economic outlook is becoming increasingly grim as the United States appears unable to escape recession from a housing meltdown, the effects of which are still spreading, the International Monetary Fund (IMF) said on Wednesday.

Global expansion is set to slow to 3,7% in 2008 amid an unfolding crisis that began in the United States, the IMF said in its semi-annual World Economic Outlook (WEO) report.

The growth estimate is a half point lower than the January WEO update, it noted.

The US economy, the world’s biggest, is likely in a “mild recession” and will stagnate through much of 2009 as housing prices slide further and credit conditions remain difficult.

For the world economy, there is a 25% chance of dropping below 3% growth in 2008 and 2009, which, according to the IMF, would be the equivalent of a global recession.

“Moreover, growth is projected to remain broadly unchanged in 2009” with growth in the advanced economies likely to fall “well below potential”, the 185-nation institution said.

The US, the epicentre of the turmoil, is poised to grow a paltry 0,5% in 2008, the IMF said, despite a multibillion-dollar government stimulus package.

US growth for 2009 will improve to 0,6%, a “modest” recovery expected as financial institutions clean up their balance sheets.

But for the short term, the risks to global growth remain “tilted to the downside”, the IMF warned in the report, a key plank of its spring meetings with the World Bank in Washington on Saturday and Sunday.

Citing the “greatest risk” as the spreading turmoil in the financial markets, the IMF underscored the potential for “deep losses” on structured credit related to the US subprime mortgage market and other sectors.

Those losses could “cause the current credit squeeze to mutate into a full-blown credit crunch”, said the institution, whose mission is to promote global financial stability.

The IMF on Wednesday estimated the credit crisis could spawn massive losses of $945-billion worldwide.

Among other advanced countries, growth in Western Europe is projected to slow “well below” potential due to financial strains, trade spill-overs and housing downturns in some countries, the IMF said.

Growth in the 15-nation eurozone is set to decelerate to 1,4% in 2008 and 1,2% in 2009, down 0,2% and 0,7%, respectively, from the January update.

Japan, the world’s second-largest economy, is poised to slow to a pace of 1,4% this year with little improvement at 1,5% in 2009.

By contrast, emerging and developing countries have proven more resilient to the distress because they are underpinned by their increasing integration into the global economy and a commodity price boom, the IMF said.

Their combined growth will decelerate to a still-robust 6,7% expansion in 2008, off 0,2 percentage points from the prior forecast, and slip to 6,6% in 2009.

China will continue to lead global growth, expanding at 9,3% in 2008 and 9,5% in 2009.

The IMF said policymakers should seek to rebuild confidence in the financial system, strengthen the soundness of institutions and ease liquidity stress.—AFP

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