Business News
IMF: US in recession, 25-per-cent chance world will follow (Roundup)
By DPA
Apr 9, 2008, 15:07 GMT

Washington - The United States economy is expected to enter a recession in 2008 and there is a 25-per-cent chance the rest of the world will follow suit, the International Monetary Fund forecast on Wednesday.

But the US recession, brought on by a crisis in the housing and financial markets, is a mild one that will likely have a lesser effect on global growth than in past down-cycles, according to the IMF's semi-annual World Economic Outlook report.

Europe has been hit by the US slowdown as well as to a lesser extent Latin America, but emerging economies in Asia, Africa and the Middle East have all shown themselves to be largely resilient.

A 0.7-per-cent contraction in US growth is expected to occur in the time period that started with the fourth quarter in 2007 and ends with the fourth quarter in 2008, the IMF said.

But for fiscal 2008, overall growth could be a positive 0.5 per cent, the IMF said.

In 2007, the US economy grew by 2.2 per cent.

The slow growth is likely to continue at 0.6 per cent in 2009 and only return to 'above potential' in 2010, according to Simon Johnson, the IMF's chief economist.

The IMF already confirmed last week, after leaked media reports, that it projects world growth to slow to 3.7 per cent in 2008 after growing at a 4.9-per-cent clip in 2007.

There is a 25-per-cent chance that 2008 world growth will fall below 3 per cent, which the IMF would rate as a global recession.

Johnson said there remained 'downside risks' to global growth due to the unpredictability of financial markets. The Washington-based institution in a separate report on Tuesday said banks could suffer losses of nearly 1 trillion dollars from the crisis.

But the wider downturn is largely due to advanced economies struck by turmoil in financial and mortgage markets, which has in turn tightened lending practices and dampened consumer spending.

Growth in the euro area is forecast to slow to 1.4 per cent in 2008 from 2.6 per cent in 2007. Central and Eastern Europe meanwhile will see growth slow to 4.4 per cent on the year compared to 5.8 per cent in 2007, largely due to lesser demand in its western neighbours.

The European Central Bank - which has so far been reluctant to follow its US counterpart in lowering interest rates - could 'afford some easing of the policy stance' as the downturn was likely to dampen inflationary pressures in 2009, the IMF report said.

Japan, though its financial institutions have so far escaped largely unscathed, will likely see growth slow to 1.4 per cent in 2008 from 2.1 per cent in 2007. The IMF said a decline in domestic spending and demand from the US and Europe could further dampen the outlook.

Developing countries by contrast have not seen a significant economic slowdown. Subir Lall of the IMF's World Economic Studies Division said emerging economies were experiencing a 'divergence,' though not a 'decoupling' from industrial nations.

Domestic demand has remained strong in China, India, Latin America and Africa, the IMF said.

China will grow at a 9.3-per-cent clip in 2008, down from 11.4 per cent the year before but still well above long-term trends. India will grow by 7.9 per cent in 2008 after climbing 9.2 per cent in 2007.

Brazil was one of the few countries which saw its 2008 growth forecast revised upwards to 4.8 per cent from the IMF's January estimate, still lower than the 5.4 per cent in 2007. Charles Collyns, deputy director of the IMF's research department said it was 'encouraging' that Latin America had been less affected by the US slowdown than in past crises.

But the IMF warned that emerging economies are now faced with the twin challenge of keeping their distance from industrial nations' troubles while avoiding a strong uptick in inflation.

Inflationary pressures have come from a surge in food, metal and energy prices, which the IMF sees as the greatest risk to the economic wellbeing of developing economies.

'Most likely there are continued inflationary and recessionary problems ahead for most of the IMF's 185 member countries,' Johnson said.