IMF deepens US recession fears by cutting global growth forecasts

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The International Monetary Fund (IMF) has slashed its growth forecast for the world economy in 2008, virtually confirming the United States is heading for recession.

The unscheduled revision to the IMF's World Economic Outlook, which was released only last October, stresses that "the risks to the global economy remain on the downside" and reduces the growth projection for the second time in less than six months.

The IMF now expects global GDP growth to reach 4.1 per cent this year rather than its previous forecast of 4.4 per cent, both considerably down on the 4.9 per cent outturn in 2007. For the US, the IMF reduced its forecast for this year by 0.4 percentage points to 1.5 per cent and lowered the Eurozone's projection by 0.5 per cent to 1.6 per cent. The fund will produce a figure for the UK in its comprehensive review in the spring.

The forecast for the American economy has now fallen from 2.8 per cent to 1.5 per cent in less than six months, and it is not difficult to see why: "The financial market strains originating in the US sub-prime sector have intensified, while the recent steep sell-off in global equity markets was symptomatic of rising uncertainty."

Although the usual definition of a recession is two successive quarters of negative growth, the National Bureau for Economic Research in the US has made it clear that any severe downturn could qualify as a recession, if it represents "a significant decline in economic activity".

American growth is set to moderate from about 5 per cent in the third quarter of 2007 to perhaps less than a third of that over 2008 – one of the sharpest decelerations in US economic history. Indeed given the momentum of US activity now, a 1.5 per cent figure for 2008 implies near-zero growth towards the end of the year.

The IMF's chief economist, Simon Johnson, added that "no one is exempt from a global slowdown. It will be very hard for even the most effective counter-cyclical policy to keep any country from having some slowdown," he said.

The IMF sees still-resilient emerging economies growing at a rate of 6.9 per cent, from 7.8 per cent last year, but even growth in China will moderate from 11.4 per cent in 2007 to 10 per cent, partly due to the slowdown in the US, Mr Johnson explained. "There are obviously linkages. I think that reports of decoupling have been greatly exaggerated. It is going to be a story of how are you linked to the US and to what extent can your policy deal with the repercussions."