IMF Survey: Global Growth Seen at 5.2 pct in 2007

IMF News, July 25, 2007

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Global growth projected at 5.2 percent in 2007 and 2008.
Revision: projections are 0.3 percentage points higher for both years than projected in the April 2007 World Economic Outlook.
Date of update: July 25, 2007.

Emerging market and developing countries account for the major upward revisions.
China: growing by 11½ percent in the first half of 2007.
India and Russia: growth “very strongly” (marked up substantially in the update).
United States: growth now expected at 2 percent this year (0.2 percentage points lower than projected in the April 2007 WEO); activity expected to regain momentum through the year and return to potential by mid-2008.
Euro area and Japan: growth has remained above trend; projections for the euro area, particularly Germany, and Japan have been raised.

Inflation generally well contained despite strong global growth.
Some emerging market and developing countries facing rising price pressures from energy and food prices.
Oil prices have risen back toward record highs against the backdrop of limited spare production capacity.
Food prices boosted by supply shortages and increased use of biofuels.
With sustained strong growth, supply constraints are tightening and inflation risks have edged up since the April 2007 WEO, increasing the likelihood that central banks will need to tighten monetary policy further.

Financial Market Update (July 25) indicates increased financial market risks as credit quality has deteriorated in some sectors and market volatility has increased.
Credit risk: weakening of credit discipline has resulted in rising difficulties in the U.S. subprime market and leveraged loan market.
- “Delinquencies, defaults, and foreclosures have continued rising, especially in the 2006 vintages of subprime lending.” — Jaime Caruana, Director, IMF’s Monetary and Capital Markets Department.
- Rising mortgage rates will translate into higher resets on adjustable-rate mortgages, many resetting this year and the next.
- Effects of previous weakening of credit discipline visible in the leveraged loan market associated with leverage buyout activity.
Market risk: recognition of credit risk has begun to translate into higher market risk, notably on products based on U.S. subprime mortgages and leveraged loans.
Emerging markets: improved fundamentals and positive developments in local capital markets, but financial vulnerabilities persist in some countries.
- Banks and corporations in some emerging market countries have tapped foreign capital markets leading to overly rapid borrowing, complicated by foreign currency exposures.

Overall balance of risks to the global growth outlook remains tilted modestly to the downside, as at the time of the April 2007 WEO.
Specific risks highlighted:
- Risk of an oil price spike remains a concern.
- Increasing likelihood of further monetary tightening by central banks due to tightening supply constraints and rising inflation risks.
- Increased credit and market risks could lead to volatility and a further repricing of some credit products.
IMF assessment: risks have increased and credit markets could remain volatile in the period ahead; however, so far the assessment is that this risk is likely to remain largely contained, although further adjustments are still possible.

IMF Survey: Global Growth Seen at 5.2 pct in 2007 — IMF Survey online, July 25, 2007