IMF Survey: IMF Predicts Slower World Growth Amid Serious Market Crisis

IMF News, April 9, 2008

Source details

Canonical URL: IMF Survey: IMF Predicts Slower World Growth Amid Serious Market Crisis

World growth will slow to 3.7 percent in 2008.
The 3.7 percent forecast for 2008 is 0.5 percentage point lower than the January 2008 World Economic Outlook Update projection.
There is a 25 percent chance that the global economy will record 3 percent or less growth in 2008 and 2009, equivalent to a global recession.
World growth would achieve little pickup in 2009.

The unfolding financial market turmoil is identified as the biggest downside risk to the global economy.
IMF Chief Economist Simon Johnson: the balance of risks lies "somewhat to the downside."
The principal downside risk: "the possibility that financial strains could deepen."
Other flagged downside risks:
- Continuing inflation worries, particularly due to increasing commodity prices.
- Large current account surpluses.
- "The uneven pattern of exchange rate movement around the world."
On currency valuations (IMF medium-term view as stated):
- "the dollar—in real effective terms—is now closer to its equlibrium value than at any time since the late 1990s, although it still remains somewhat on the strong side."
- "The euro is on the strong side."
- "the yen remains undervalued."
- "the Chinese renminbi 'remains considerably or substantially undervalued.'"
Market sentiment note: "sentiment in financial markets has improved in recent weeks since the Federal Reserve's strong actions with regard to investment banks," but "the possibility of a negative spiral remains a possibility."

The IMF predicts the United States will slip into a "mild recession" in 2008, recovering only modestly in 2009.
Factors weighing on U.S. activity: deteriorating financial market confidence, weak consumption, deteriorating labor market conditions, sluggish growth in disposable incomes, higher energy costs, and tighter constraints on household borrowing.
Despite "aggressive easing by the Federal Reserve and a timely fiscal stimulus package," significant strains in housing and credit markets are expected to be protracted.
House price estimate: from 2007 until end-2008, house prices in the United States would have fallen by about 14-20 percent.
U.S. growth forecasts:
- U.S. forecast for 2008 marked down to 0.5 percent—1 percentage point lower than January 2008 projection and down from 2.2 percent in 2007.
- On a fourth quarter to fourth quarter basis, U.S. output is projected to decline to 0.7 percent in 2008.
- Forecast for 2009 marked down to 0.6 percent on a year-on-year basis; the fourth quarter to fourth quarter estimate is 1.6 percent.

The ongoing financial crisis has caused persistent liquidity shortages, pressure on capital of banks and other financial institutions, increasing credit risks, and sharply falling prices of mortgage-related and other structured securities as well as of equities.
Western Europe: growth expected to remain sluggish in 2008 and 2009, largely due to financial strains and trade spillovers; softening house prices in many countries are a source of concern.
Euro area growth estimate: 1.4 percent in 2008—compared with 2.6 percent in 2007.
United Kingdom growth estimate: 1.6 percent in 2008—compared with 3.1 percent in 2007.
Japan has remained more resilient to the downturn.

Emerging economies have so far been less affected by financial market turbulence and have continued to grow at a rapid pace, led by India and China, though activity is beginning to moderate in some countries.
Growth across all emerging and developing regions is expected to remain above trend.
China and India projections:
- China grew at 11.4 percent in 2007 and is projected to grow at 9.3 percent in 2008.
- India grew at 9.2 percent in 2007 and is projected to grow at 7.9 percent in 2008.
Vulnerabilities remain for countries that relied heavily on short-term cross-border borrowing or have stronger trade ties with the United States.
Three broad factors driving momentum in emerging and developing economies:
- Strong productivity gains from global integration.
- Better terms of trade for commodity producers as prices of commodities continue to soar.
- Stronger institutions and macroeconomic policy frameworks.
Policy suggestion for China (as articulated by Simon Johnson): "allow for some exchange rate appreciation" of the renminbi; consider tightening monetary policy and easing fiscal policy to rebalance the economy.

The IMF commodity price index rose by 44 percent from February 2007 to February 2008.
Prices of many commodities—including crude oil, tin, nickel, soybeans, corn, and wheat—reached record highs in current U.S. dollar terms.
Drivers of commodity price rises:
- Strong demand from emerging economies.
- Biofuel-related demand adding to demand for major food crops, especially corn.
- Supply adjustments have not kept up, especially for oil, leading to medium- to long-term low inventory levels.
- Financial trends: effective depreciation of the dollar, falling U.S. policy interest rates, and emergence of commodities as an alternative asset class.
Inflation trends:
- Headline inflation (total inflation, including food and energy) has increased across the world.
- Core inflation (excluding food and energy) is edging up.
- Inflation is rising more markedly in many emerging and developing economies, reflecting buoyant food and energy prices, strong demand, credit growth, and greater weight of energy and food in consumption baskets.

In a multipolar world with deepening cross-border linkages, policy actions need to fully take into account cross-border interactions while recognizing country-specific circumstances.
Advanced economies face the dual challenge of addressing financial turmoil and downside growth risks while keeping an eye on inflation and long-term concerns.
Emerging and developing economies need to ensure strong current growth does not lead to inflation buildup, while remaining alert to risks from growth slowdown in advanced economies.
Fiscal policy role:
- Fiscal policy could play a useful stabilizing role in advanced economies in the event of a continuing downturn.
- In case of a severe global downturn, providing fiscal stimulus across a broad group of countries could prove much more effective than isolated efforts by bolstering confidence and demand, given inevitable cross-border leakages from added spending in open economies.

IMF Survey: IMF Predicts Slower World Growth Amid Serious Market Crisis (IMF Research Department, April 9, 2008)