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IMF lowers forecast for growth

The agency, citing U.S. woes, says the global economy will be the weakest in five years.

January 30, 2008|From Reuters

WASHINGTON — The International Monetary Fund cut its 2008 forecast for world growth Tuesday, saying the global economy will deliver the weakest performance in five years as U.S.-originated financial strains intensify.

The IMF said no country would escape fallout from the crisis in the U.S. sub-prime mortgage market, where loans made to less creditworthy borrowers were packaged into securities by Wall Street firms and sold around the world.

Defaults on the loans are soaring, and no one has a firm estimate on eventual losses. Banks are continuing to write down billions of dollars in projected losses, raising fears that they will be reluctant to lend, which would further crimp economic expansion.

"It is a significant slowdown. It is a global slowdown, without any question," IMF chief economist Simon Johnson said.

"The overall balance of risks to the global growth outlook is still tilted to the downside," the IMF said in an update to its semiannual World Economic Outlook released in October.

The agency lowered its global 2008 growth projection to 4.1% from 4.4%.

That would be the weakest performance since 2003, when world growth notched 3.6%, and reflects a marked slowdown from the 4.9% pace last year -- though emerging economies have held up so far and China has not faltered.

"The financial market strains originating in the U.S. sub-prime sector . . . have intensified while the recent steep sell-off in global equity markets was symptomatic of rising uncertainty," it said.

The IMF cut its U.S. growth forecast for this year by 0.4 percentage point to 1.5% and lowered the euro-zone projection by 0.5 percentage point to 1.6%.

European officials are trying to put some distance between themselves and the idea that a U.S. slowdown necessarily means they too will suffer as the IMF suggested would happen.

A member of the European Central Bank's Governing Council, Athanasios Orphanides, said Tuesday that he foresaw only a modest effect in Europe while acknowledging that U.S. performance was worse than expected.

The IMF lowered Japan's forecast by 0.2 percentage point to 1.5%. But China's economy was still expected to expand by a respectable 10% this year.

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