IMF Survey: IMF Forecasts Slower World Growth in 2008

IMF News, October 17, 2007

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"World economic growth is expected to slow to 4½ percent next year" (lead paragraph).
According to the October 2007 World Economic Outlook released on October 17: global growth would slow from 5.2 percent in 2007 to 4.8 percent in 2008, down from the 5.4 percent rate registered in 2006.
Before the August turbulence, growth was running above 5 percent in the first half of 2007.
The IMF expects healthy growth to continue into 2008, with emerging market economies continuing to serve as the main growth engine of the world economy.

China: grew by 11½ percent (first half of 2007) and "will grow by about 10 percent in 2008" (IMF forecast).
India: continued to grow very strongly at more than 9 percent.
Russia: grew by almost 8 percent.
United States:
- Growth is projected to remain at 1.9 percent in 2008, the same rate as in 2007.
- This is "a markdown of almost 1 percentage point compared to the IMF's previous projections."
- U.S. growth is down from 2.9 percent in 2006.
- The U.S. economy experienced moderate growth of about 2¼ percent in the first half of 2007, with the housing sector exerting considerable drag.
Euro area: growth marked down to 2.1 percent in 2008.
Japan: growth expected at 1.7 percent in 2008.
Emerging markets: expected to continue to expand strongly, though growth is expected to slow from the heady pace of the past two years; emerging markets accounted for a dominant share of global expansion.

IMF Chief Economist Simon Johnson: a benign financial environment built up a sizeable "underbrush" of risky loans, relaxed lending standards, and high leverage in certain areas; when problems ignited in the U.S. subprime mortgage market, the fire "jumped" in somewhat surprising ways to other areas.
"At least three important `fire breaks'—that should have limited the impact of the crisis in U.S. subprime mortgages—did not hold," Johnson said. He noted, however, that some important firebreaks did hold, including relatively little impact on U.S. investment grade corporate bonds and limited spread to emerging market and developing countries.
The IMF's baseline projections assume that market liquidity is gradually restored in coming months.
Downside scenario: turbulent conditions could have a deeper effect on credit availability than assumed, with "considerably greater macroeconomic impact."
- Mortgage lenders tightening lending standards could lead to a sharper downturn in housing markets.
- Rising delinquencies would hurt mortgage lenders' balance sheets and reduce consumption and residential investment spending.

Main downside risk: disruption of capital flows to emerging markets and problems in domestic markets, especially for emerging Europe and Commonwealth of Independent States due to large current account deficits and reliance on bank-related inflows.
Inflation concerns:
- Inflationary risks have receded somewhat in advanced economies since the financial turbulence began, but remain more immediate in emerging market and developing countries.
- Contributing factors: rising food prices, dwindling spare capacity, continuing high oil prices, and strong foreign exchange inflows.
- Monetary policy in some emerging market and developing countries "needs to tighten further to contain inflation pressures."
Oil market risks: global oil markets remain very tight, spare capacity limited; supply shocks or heightened geopolitical concerns could produce further oil price spikes and higher inflation.

U.S. current account deficit is projected to decline only slightly to 5½ percent of GDP this year and next.
Current account surpluses of oil producing countries are expected to come down as these countries ramp up spending; China's current account surplus "remains very large."
Persistent, large global imbalances raise two principal concerns:
- the possibility of a disorderly depreciation of the U.S. dollar, which could have severe repercussions throughout global financial markets.
- sustained large trade imbalances, which could prompt rising protectionist pressures.

Despite the recent test from financial turbulence, "generally sound fundamentals should keep the global economy on course."
The IMF stresses monitoring and restoring market liquidity, containing inflationary pressures in emerging markets (including possible monetary tightening), and vigilance regarding global imbalances to reduce the risk of disorderly adjustments.
Key near-term policy focus areas implied by the assessment:
- Restore and maintain market liquidity to support the baseline recovery scenario.
- Monitor and, where needed, tighten monetary policy in emerging market and developing countries to contain inflation.
- Address vulnerabilities in mortgage and bank balance sheets to limit amplification of housing sector downturns.
- Reduce reliance on volatile capital inflows in vulnerable regions (emerging Europe, CIS) and manage large external imbalances to lower risk of disruptive exchange rate or trade adjustments.

IMF Survey: IMF Forecasts Slower World Growth in 2008 (IMF Research Department, October 17, 2007).