IMFSurvey Magazine: IMF Research
World Economic Outlook
IMF Sees World Growth Slowing, With U.S. Marked Down
IMF Survey online
January 29, 2008
- Financial turbulence clouds world growth prospects
- U.S. growth slows notably, with weaker manufacturing and housing activity
- Slight slowdown in China could alleviate overheating concerns
Buffeted by recent financial market turbulence and a weakening U.S. performance, world growth is projected to slow to 4.1 percent in 2008, down from an estimated 4.9 percent last year, the IMF said in its quarterly update for the global economy.
Financial market strains originating in the U.S. subprime sector—and associated losses on bank balance sheets—have intensified, while the recent steep sell-off in global equity markets was symptomatic of rising uncertainty, the IMF stated.
While projecting growth of above four percent for the global economy, the IMF said there was a risk that the ongoing turmoil in financial markets would further reduce domestic demand in the advanced economies with more significant spillovers into emerging market and developing countries. "Growth in emerging market countries that are heavily dependent on capital inflows could be particularly affected, while the strong momentum of domestic demand in some emerging market countries provides upside potential," the World Economic Outlook Update said.
A number of other risks remain elevated. "Monetary policy faces the difficult challenge of blancing the risks of higher inflation and slower economic activity, although a possible softening of oil prices could moderate inflation pressures," the IMF said.
The IMF made the following comments and projections for key areas of the global economy:
Economic growth in the United States appears to have slowed notably in the fourth quarter of 2007, with recent indicators showing weakening of manufacturing and housing sector activity, employment, and consumption.
U.S. growth is projected by the IMF to slow to 1.5 percent this year, down from 2.2 percent last year, but the update points out that this number for 2008 reflects the carryover from 2007. Projections on a quarterly basis (Q4-Q4) give a better sense of the slowing growth momentum. On this basis, growth is projected at 0.8 percent in the fourth quarter of 2008, compared with 2.6 percent during the same period of 2007.
The IMF has said that the recent move by the U.S. Federal Reserve to cut the Federal funds rate by 75 basis points was "appropriate and helpful."
Growth has also slowed in western Europe and confidence indicators have generally deteriorated. For the euro area, growth on an annual basis is projected at 1.6 percent in 2008, down from 2.6 percent last year. On a Q4-Q4 basis, growth is projected at 1.3 percent, compared with 2.3 percent in 2007.
At a January 29 news briefing in Washington, IMF research head Simon Johnson said inflation remained a serious concern in Europe and the European Central Bank had done a good job of managing liquidity
Japanese growth has been dampened by a tightening in building standards, while consumer and business sentiment have weakened. Japan's growth is forecast on an annual basis at 1.5 percent in 2008, down from 1.9 percent last year, although on a Q4-Q4 basis growth is forecast to improve somewhat to 1.6 percent from 1.2 percent in the fourth quarter of 2007.
Emerging markets and developing countries
Despite some slowing of export growth, emerging market and developing countries have thus far continued to expand strongly, led by China and India. These countries have benefited from the strong momentum of domestic demand, more disciplined macroeconomic policy frameworks, and in the case of commodity exporters, from high food and energy prices.
Growth in emerging market and developing countries is also expected to ease, moderating from 7.8 percent (annual basis) in 2007 to 6.9 percent in 2008. In China, growth is projected to decelerate from 11.4 percent to 10 percent, which should help alleviate overheating concerns.
But growth in Africa is projected to pick up to 7.0 percent from 6.0 percent in 2007.
Inflation and interest rates
Headline inflation has increased since mid-2007 in both advanced and emerging economies. Core inflation has also drifted upward. In the United States, the Federal Reserve has been cutting interest rates in response to increasing downside risks to activity, while policy has been on hold in the euro area and Japan. Meanwhile, central banks have continued to tighten monetary policy in many emerging market economies, where food and energy represent a higher share of consumption baskets and overheating is more of a concern.
The latest IMF projections are calculated using revised purchasing power parity (PPP) data published by the International Comparison Program in December 2007. This has resulted in a downward revision of the previous estimates of global growth during 2005-07 of around ½ percentage point a year relative to the estimates in the October 2007 World Economic Outlook. For additional details see "Global Growth Estimates Trimmed After PPP Revisions."
Financial market outlook
In a separate Global Financial Stability Report Market Update, the IMF said that deteriorating economic conditions could exacerbate pressures on major financial institutions that have already suffered big losses from the subprime crisis.
A possibly deeper economic downturn in the United States or elsewhere could also serve to widen the crisis beyond the subprime sector, as credit deteriorates more broadly, it stated.
Already delinquency rates in 2007 vintages of U.S. prime mortgages (those to the most credit worthy borrowers) are rising faster than in previous years, albeit from low levels, and other forms of consumer credit show signs of deterioration (see chart).
In Western Europe, signs of a future slowdown in credit growth are just now emerging and there is some potential for worsening credit quality as lending has been very robust in some countries and several countries face housing markets considered overvalued, the IMF warned.
Lending in some segments of the corporate sector also expanded rapidly in the first half of 2007 with the rise in leverage buyouts. Weaker quality corporates have already seen a substantial rise in the cost of credit although yields investment grade debt have remained relatively stable. Additionally, a slowing economy will likely exacerbate the tighter credit environment further as unemployment picks up and job growth slows.
Emerging markets have been resilient so far, but face challenges ahead. Emerging market equities have outperformed mature equity markets, but prices in some markets have declined steeply since the start of the year on expectations that the U.S. economy may slow more rapidly. "Signs of spillover are most evident in the sharp fall in private emerging market bond issuance, particularly in some emerging European economies whose banks have relied heavily on external financing to support rapid domestic credit growth," the Financial Market Update stated. Generally, flows to emerging markets have remained positive up to now.