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IMF cuts world, euro zone growth outlook: source

The International Monetary Fund has trimmed its forecasts for 2008 and 2009 world economic growth, largely due to a marked worsening in the outlook for the euro zone, a G20 finance official told Reuters on Monday.

With a sharp US economic slowdown starting to spill out into other regions, the official said the International Monetary Fund had downgraded its world growth forecast for this year to 3.9%, down from 4.1% in its World Economic Outlook last month. It projects 2009 growth of 3.7%, down from 3.9%, in a note prepared for a meeting of deputy finance ministers of the Group of 20 (G20) emerging and industrialized economies to be held in Rio de Janeiro on August 30. “Commodity prices will remain high and volatile... (and) market turbulence will go on through 2009,” said the official, adding that the IMF saw the world economy slowing further in the second half of the year.

The Fund left unchanged its forecast for 2008 US growth at 1.3% and shaved its outlook for 2009 growth to 0.7% from 0.8% but was more downbeat in its new forecasts about the prospects for the euro zone economy. It cut its forecast for euro zone growth this year to 1.4% from the 1.7% it had predicted in July and estimated 2009 growth at 0.9%, down from 1.2%, said the official who spoke on condition of anonymity.

The Reuters story helped euro zone government bonds extend gains as traders viewed the new IMF forecasts as more evidence that the European Central Bank faces mounting risks to growth which will prevent it from raising interest rates. The ECB has acknowledged that risks to economic growth are increasing but, with inflation near record highs, it is widely expected to leave interest rates unchanged at 4.25% through the rest of this year.

The latest forecasts mark the start of the IMF’s latest assessment of the world economy, which will be finalized when it issues its autumn WEO in Washington in October. While the official did not specify why the IMF had cut its euro zone growth forecasts, its updated predictions come less than two weeks after data showed the euro zone economy suffered its first ever contraction in the Q2.

Most financial market analysts expect little, if any, growth in the third quarter given the weakness of recent confidence and activity data from the 15-nation bloc. They are also inclined to brand as too optimistic the European Commission’s April forecast, which predicted euro zone growth of 1.7% this year. (Reuters)