Business | Economy
IMF lowers forecast for world growth
The International Monetary Fund cut its forecast for global growth this year and said there's a 25 per cent chance of a world recession, citing the worst financial crisis in the US since the Great Depression.
- Bloomberg
- Published: 00:05 April 3, 2008
New York: The International Monetary Fund cut its forecast for global growth this year and said there's a 25 per cent chance of a world recession, citing the worst financial crisis in the US since the Great Depression.
The world economy will expand 3.7 per cent in 2008, the slowest pace since 2002, according to a document obtained by Bloomberg News at a meeting of Southeast Asian deputy finance ministers and central bankers in Da Nang, Vietnam. In January the fund projected growth of 4.1 per cent.
The reduction is the third by the Washington-based lender since last July, when it predicted the world economy would cope with the US credit squeeze and grow 5.2 per cent this year.
Central banks will need to conduct policy "as flexibly" as the circumstances warrant, the statement said, adding that the European Central Bank has room to lower borrowing costs.
"The financial shock that originated in the US subprime mortgage market in August 2007 has spread quickly, and in unanticipated ways, to inflict extensive damage on markets and institutions at the core of the financial system," the statement said.
"The global expansion is losing momentum in the face of what has become the largest financial crisis in the United States since the Great Depression."
US Treasury Secretary Henry Paulson said yesterday "that sounds over-blown to me."
The IMF forecasts were on a slide presentation prepared by its Asia-Pacific department. Bill Murray, an IMF spokesman in Washington, declined to comment on the report. The lender is scheduled to publish its new forecasts on April 9.
The world's biggest financial companies have reported about $232 billion in credit losses and writedowns since the start of 2007, data compiled by Bloomberg show.
UBS AG said on Tuesday it will have $19 billion more writedowns on assets related to mortgage assets, and Deutsche Bank AG reported $3.9 billion of further value reductions.
That's prompting banks to stop lending to all but the safest borrower, undermining consumer spending and business investment.
"The IMF's forecast is now below the world economy's longer-term trend so there is certainly some significance in what it is now seeing," said Andy Cates, a global economist at UBS in London.
"The world economy is slowing quite considerably and will be very different from what we've become accustomed to."
The IMF gave a 25 per cent chance that global growth will drop to three per cent or less in 2008 and 2009, a pace the fund described as equivalent to a world recession. The last time that happened was in 2001.
The fund lowered its forecast for US economic growth to 0.5 per cent this year, according to the document. The euro region will expand 1.3 per cent in 2008, the document said, down from the fund's 1.6 per cent projection in January.
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