IMF cuts growth guess and
confidences By Abid Aslam
WASHINGTON - The International Monetary
Fund (IMF) has again cut its forecast for world
economic growth and is bracing for more bad news
in rich and poor countries, even as it stopped
short of using the word "recession" on Tuesday.
This year, the global economy will post
its weakest performance in five years, the global
economic watchdog said in an update to its
semi-annual World Economic Outlook report.
The warning comes days after IMF managing
director Dominique Strauss-Kahn broke with
tradition and asked governments to spend more -
even at the cost of increasing budget deficits,
which the agency normally considers a cardinal sin
- to stimulate their
economies. Strauss-Kahn cited
the severity of the unfolding downturn.
Growth in 2008 likely will slow to 4.1%,
from 4.9% in 2007. Last October, it predicted 4.4%
growth for 2008. This would be the worst
performance since 2003, when the world economy
grew by 3.6%, according to the IMF.
"The
overall balance of risks to the global growth
outlook is still tilted to the downside," the fund
said.
The fund blamed its gloomier outlook
on the US subprime mortgage crisis and its
spillover into world financial markets. It
cautioned that growth in the United States, the
world's largest economy, could grind down to a
negligible 0.8% in 2008. It also cut its estimate
of 2007 US growth from 2.6% to 1.5%.
Other
wealthy economies already are being dragged down
by mayhem in world markets, the IMF said. Emerging
markets will fare better but none will come out of
the global crisis without scars.
"The
revision is mostly accounted for by a weaker
outlook for advanced economies," said Simon
Johnson, the fund's chief economist. "Growth in
emerging markets, the engine of global growth, is
expected to generally hold up well, but here too
we expect growth to also slow this year."
China and India will lead growth in
output, thanks in large measure to strong domestic
demand, the fund said, adding that commodity
exporters also will reap the rewards of high
prices for energy, metals, and food. High food
prices are proving a mixed blessing, however.
"Headline inflation has generally
increased across advanced and emerging market
countries, reflecting sharp increases in food and
energy prices," said Johnson. "In advanced
economies, inflation pressures are expected to
subside sooner or later as economies slow,
although there are serious concerns about possible
second-round effects. In some emerging market
countries, inflation remains a major issue," he
added.
Food accounts for a large share of
consumer spending in developing countries, which
also could face greater risks as the financial
turmoil unleashed in the United States plays out
across the globe.
"The main risk is that
the ongoing turmoil in financial markets could
further weigh on domestic demand in advanced
economies and that a sharper slowdown could then
impart more significant spillovers to emerging
market and developing countries," said Johnson.
"Emerging market countries that are
reliant on capital inflows could be directly
affected," he added.
As recently as a few
months ago, the IMF urged continued fiscal
restraint in the United States and other countries
faced with large deficits. In recent days,
however, the agency has welcomed a nascent US
proposal for some US$150 billion in deficit
spending as necessary to stimulate the economy and
ward off a recession.
Strauss-Kahn, the
fund chief, jolted the financial commentariat last
week, when he told the World Economic Forum in
Davos, Switzerland, that the global financial
situation is so severe that lower interest rates
alone will not suffice "to get out of the turmoil
we are in".
"I don't think we will get rid
of the crisis with just monetary tools," he was
quoted as saying. "A new fiscal policy is probably
today an accurate way to answer the crisis."
The Financial Times described his remarks
as "a dramatic volte face".
"Strauss-Kahn's words rip apart a
long-standing global consensus that fiscal
retrenchment in the US and Japan is needed to help
reduce huge trade imbalances," the newspaper said
on Monday. "It comes as the IMF is due to release
new economic forecasts this week which, he said,
would show a 'serious slowdown and it needs a
serious response'."
It further quoted
Larry Summers, a former US Treasury Secretary, as
saying: "This is the first time in 25 years that
the IMF managing director has called for an
increase in fiscal deficits and I regard this as a
recognition of the gravity of the situation that
we face."
A key committee of the US
Federal Reserve began two days of talks on Tuesday
amid expectations it would announce further
interest rate cuts aimed at easing the credit
crunch.
Investment bankers and analysts
also have been warning that credit cards and
consumer loans are next in line for the kind of
trouble already spawned by risky US mortgages and
associated financial speculation.
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