US economic woes prompt IMF to cut its world growth forecast for 2008

In its semiannual World Economic Outlook, the IMF scaled its prediction for US economic growth back to 1.9% from 2.8%. Declining home sales, rising mortgage defaults, and tighter credit conditions will no doubt “extend the decline in residential investment,” in the US economy, and could pose a serious threat to household spending. Evidence of the US economic expansion continuing “below trend would justify further interest rate reductions provided that inflation remains contained,” the report said. In calculating its estimate, the IMF assumed the US Federal Reserve would cut interest rates by another half a point by the end of the year. It also anticipates that both the European Central Bank and the Bank of England will hold their rates steady.

However, “robust” growth in China, India, and Russia accounted for half of worldwide growth over the past year, and should be enough to counterbalance the pullback in America, the report said. The IMF cut its growth estimate for the 13-nation euro region to 2.1% from 2.5%. Japan’s GDP is expected to slow from 2% to 1.7%. China, India, and Russia are all expected to maintain their high levels of growth. The IMF has penciled China in for 10% growth in 2008, after this year ranking Number One in global growth for the first time ever - thanks to an expansion rate of 11.5%.

India should record growth of 8.4% in 2008 and Russia 6.5%, the IMF predicts. Overall, the IMF said that high oil prices and rising commodity prices could jeopardize global growth. “Global oil markets are very tight,” the report said. “Oil prices are likely to remain high in the absence of further change in OPEC’s quota policies or a major global slowdown.” Another key worry: “Heightened geopolitical concerns could lead to further price spikes that could quickly translate into higher headline inflation.” The IMF singled out emerging markets as the most immediate risk, because of a heightened vulnerability to spikes in food prices.

Asked in an interview with Le Monde whether the US lending crisis and Chinese surpluses threatened world growth, Rato said: “Not necessarily.” “It’s true that the crisis over American mortgage lending is serious. It has had and will have an impact on growth in the United States and Europe,” he said. “The slowdown in the property market started there before the summer. It could get worse. That isn’t the case yet and I would note that growth remains vigorous,” he said. (moneymorning.com, Reuters)