The IMF expects the global economy to slow to 3.7 per cent in 2008 and 2009, down from its earlier forecast of 4.1 per cent growth and 1.25 per cent over 2007. The fund further predicts that there is a 25 per cent chance global growth could drop below three per cent in 2008 and 2009. Earlier, in January, it had lowered its forecast for global economic growth this year to 4.1 from 4.4 per cent, the lowest since 2003, due to last year’s increase in credit costs resulting from defaults on mortgages aimed at borrowers with poor credit histories hurting the rest of the economy.

In its latest update, the IMF is of the opinion that credit crunch, which started in the subprime mortgage market, has spread quickly in unexpected ways and the global expansion is losing momentum. The IMF’s forecast of a 25 per cent chance that global growth could drop below three per cent in 2008 and 2009 amounts to a warning that emerging market growth could fall to sub-par levels. Unlike developed nation economies, most emerging markets should grow at rates above four per cent, in order speed basic-needs development and increase real incomes.

Blaming the twin forces of deteriorating financial market conditions and the continuing correction in the U.S. housing market, the IMF predicts that the United States will slip into a “mild recession” in 2008, from which it will recover only modestly in 2009. This reflects the time it takes for financial institutions and households to resolve their balance sheet problems. The IMF estimates that, from 2007 until end-2008, house prices in the United States would have fallen by about 14-20 per cent. It has marked down sharply its US forecast for 2008 to 0.5 per cent—one percentage point lower than what was forecast in January 2008 and down from a 2.2 per cent growth rate in 2007. The forecast for 2009 has been marked down to 0.6 percent on a year-on-year basis. Global downturn in economic growth will be spurred on by the US, which will see growth in the UK slow to 1.6% in 2008/09. The sharp decline in growth in the UK economy would come as a result of a weakening housing market, contraction of the financial sector and impact on UK exports that will come as a result of weaker growth in the US and Europe as well.

Crisis: The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression. According to the IMF,t the countries that will be hardest in any global downturn will be those with excessive house price inflation, marking Spain, Ireland and the UK as the most venerable. Growth in Europe is expected to slow significantly in 2008-09, reflecting spillovers from weaker global growth, rising commodity prices and the strains in financial markets. The European economy is resilient but not immune to global economic threats. GDP growth in the Eurozone will slow to 1.4 this year and 1.2 per cent in 2009. In 2007, growth was 2.6 per cent.

Economic growth in Russia and emerging European economies will likely cool this year as financial market turmoil curbs access to credit and demand for oil. Russia, which logged growth of 8.1 per cent last year, will see growth moderate to 6.8 per cent this year and then 6.3 per cent next year. Growth in the Commonwealth of Independent States was expected to ease to seven per cent this year from 8.5 per cent in 2007. Risks to the outlook were tilted to the downside.

Despite slowing world growth, the outlook for the Middle East and Central Asia remains favorable in 2008, with commodity prices, including oil, expected to remain high, according to the IMF’s latest regional forecast. The surge in investment and strong productivity gains from broad-based structural reforms are expected to sustain growth above the 6 percent level. However, against the background of persistently high fuel and food prices, strong domestic demand, and supply bottlenecks, inflation in the region is forecast to climb to 10.7 in 2008, up from 9.2 per cent last year.

Asia’s strong economic growth will persist despite an ailing US economy. According to Merrill Lynch’s chief Asia economist, Asian economies are in a better position to withstand the impact of a US recession, unlike in the past. Despite a global credit crunch resulting from a crisis in the US housing market, Asian economies expanded 9.5 per cent and China grew 11.5 per cent in the second half of last year. In the first quarter of this year, the region is expected to grow a slower but still robust 9.0 percent, and China 10.5 per cent. However, inflation is a bigger risk to the region than a slowdown induced by a recession in the United States, the world’s biggest economy.

Asian exports to Europe have been growing 25-28 per cent annually due mainly to the stronger euro currency which makes Asian goods cheaper. Intra-Asian trade has also increased. Europe has been the number one driver of Asian exports over the past few years, not the United States. Any slowdown in exports should be offset by an increase in consumption, powered by the emergence of younger and wealthier Asians who, unlike their parents, would like to spend their money.

According to the Asian Development Outlook, East Asia and especially China has increasingly become a “growth pole” in the world economy – acting as a counterweight to the slowing industrial economies. Last year, developing East Asia recorded its highest growth rate in over a decade, capping a decade of improvements following its home grown financial crisis in1998. Yet this is hardly a time for celebration, but rather one for concern. Although East Asia will undoubtedly be affected, it is reasonably well positioned to navigate this crisis without incurring significant damage to its prospects. Yet the challenges ahead should not be underestimated.

Testing times: East Asian economies will face testing times in 2008. Most analysts now expect the US economy to see either near zero or negative growth in the first half of the year, followed by a mild recovery in the second half of the year, accompanied by slower growth in Japan and Europe. Substantially higher world oil and food prices will further erode incomes in the bulk of the East Asian region, the latter particularly hurting the poor.

Developing East Asian economic growth in this global slowdown scenario is expected to fall to 8.6 per cent in 2008, the lowest since 2002, down from 10.2 per cent in 2007. China’s growth is expected to finally dip below 10 per cent, after five years at 10 per cent plus rates, mainly due to lower export growth. Elsewhere, growth is expected to ease more modestly to the 5-6 per cent range for middle income economies like Indonesia, Malaysia and Philippines.

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