IMF Cuts 2008 Global Growth Forecast to 4.1 Percent

IMF Cuts 2008 Global Growth Forecast to 4.1 Percent

Jan. 29 (Bloomberg) -- The International Monetary Fund cut its forecast for global growth this year to the weakest pace since 2003 as tighter access to credit in the U.S. weighs on other assets and economies.

The world economy will expand 4.1 percent this year, down from 4.9 percent in 2007 and below the 4.4 percent pace projected in October, the fund said in a report today.

The lower forecast echoes a deepening pessimism among private economists about the global outlook, with some predicting growth will approach the 3 percent pace deemed to be a worldwide recession. Central banks should provide liquidity ``as long as needed'' to minimize the impact on growth from financial turmoil, the IMF said.

``No one is going to be exempt from some slowdown,'' IMF Chief Economist Simon Johnson said at a briefing in Washington.

The IMF lowered its U.S. growth forecast to 1.5 percent, down from its previous prediction of 1.9 percent, and cut its euro-region estimate by half a point to 1.6 percent.

In an update of its Global Financial Stability Report, also released today, the fund said the tumult in financial markets has ``reached a new phase -- a phase where credit concerns now extend beyond the subprime sector.''

``The overall balance of risks to the global growth outlook is still tilted to the downside,'' the fund said. ``The main risk'' is that financial volatility further cuts consumer spending in advanced economies, spreading to emerging markets, the IMF said.

Credit Pressures

The fund said that strains on banks threaten their ability to lend. ``Pressures on capital combined with additional losses as delinquencies on U.S. subprime borrowing reach record levels, raises the costs and reduces the capacity of financial institutions to use their balance sheets to provide credit.''

The premiums banks charge each other for lending beyond overnight ``are likely to remain elevated for some time,'' the IMF said.

Fund economists also warned of rising inflationary pressures, saying that the upward drift in both core and headline inflation posed a dilemma for policy makers.

``Monetary policy faces the difficult challenge of balancing the risks of higher inflation and slower economic activity, although a possible softening of oil prices could moderate inflation pressures,'' the fund said.

Johnson, in the briefing, said ``it remains appropriate to keep interest rates on hold at this time'' in the European Union. ``The euro zone finds itself in a difficult position,'' he said. ``The economy is slowing but inflation remains a concern.''

Fed Rate Cuts

In the U.S., the Federal Reserve's ``monetary policy remains effective and is going to have an effect on the real economy,'' Johnson said. Economic stimulus that Congress is considering ``could be quite helpful,'' he said.

Emerging markets will probably continue to weather the deterioration in advanced economies, as China's 2008 growth outlook was left unchanged at 10 percent from the previous forecast, down from an 11.5 percent expansion in 2007. The deceleration of China's growth pace ``should help alleviate overheating concerns,'' the IMF said.

The fund predicted emerging and developing countries will expand 6.9 percent this year, compared with 7.8 percent in 2007.

``Strong momentum of domestic demand in some emerging- market economies provides upside potential,'' the fund said. Still, ``growth in emerging market economies that are heavily dependent on capital inflows could be particularly affected'' by the weakening in the U.S. and Europe, it added.

Housing Slump

By another measure, growth in the U.S. and Europe will be even weaker this year. Measuring gross domestic product in the fourth quarter compared with the final three months of 2007, the U.S. will expand just 0.8 percent this year, the fund said. In the euro region, the pace will slow to 1.3 percent.

In the U.S., recent figures showed weakening in housing, manufacturing, employment and consumer spending, the fund noted. A private report today showed home prices in 20 U.S. cities fell more than forecast in November, recording the 11th straight decline.

``Confidence indicators have generally deteriorated'' in Europe, the IMF also said. A gauge of consumer sentiment in France dropped to a record low in January, Insee, the Paris- based national statistics office, said today.

Japan's economy is projected to expand 1.5 percent this year, down from 1.9 percent in 2007 and less than the IMF's previous estimate of 1.7 percent, today's report showed.

``Growth has been dampened by a tightening in building standards, while consumer and business sentiment has weakened'' in Japan, the fund said.

The IMF reiterated that it is reviewing lessons from the subprime crisis.

``Supervisors and auditors have a key role to play to promote early, consistent and clear disclosure of exposures and values of subprime and related securities, both on and off the balance sheet,'' the fund said.

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