The International Monetary Fund (IMF) has slashed its growth forecast for the world economy in 2008, virtually confirming the US is heading for recession.
The IMF’s chief economist Simon Johnson said “no one is exempt from a global slowdown. It will be very hard for even the most effective counter-cyclical policy to keep any country from having some slowdown”.
The unscheduled revision to the IMF’s World Economic Outlook, which was released only last October, stresses “the risks to the global economy remain on the downside” and reduces the growth projection for the second time in less than six months. The IMF expects global GDP growth to reach 4.1 per cent this year rather than its previous forecast of 4.4 per cent, both considerably down on the 4.9 per cent rise in 2007.
For the US, the IMF reduced its forecast for this year by 0.4 percentage points to 1.5 per cent and lowered the Eurozone’s projection by 0.5 per cent to 1.6 per cent. The fund will produce a figure for the UK in its comprehensive review.
The forecast for the American economy has now fallen from 2.8 per cent to 1.5 per cent in less than six months, and it is not difficult to see why. “The financial market strains originating in the US sub-prime sector have intensified, while the steep sell-off in global equity markets was symptomatic of rising uncertainty,” said Johnson.
Although the usual definition of a recession is two successive quarters of negative growth, the National Bureau for Economic Research in the US has made it clear any severe downturn could qualify as a recession, if it represents “a significant decline in economic activity”.
Given the momentum of US activity now, a 1.5 per cent figure for 2008 implies near-zero growth towards the end of the year.
The IMF sees still-resilient emerging economies growing at a rate of 6.9 per cent, from 7.8 per cent last year, but even growth in China will moderate from 11.4 per cent in 2007 to 10 per cent, partly due to the slowdown in the US, Johnson said.
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