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.

European Union

Growth in the European Union is expected to ease to two per cent in 2008 and 1.8 per cent in 2009 from 2.8 per cent in 2007 (1.7 and 1.5 per cent in the euro area from 2.6 per cent in 2007), according to the Commission’s spring economic forecast. This is 0.5 percentage point lower than predicted in the autumn forecasts. The weaker economic outlook follows from continued distress in the financial markets, a marked slowdown in the US - which the Commission expects to grow 0.9 per cent this year and 0.7 per cent in 2009 versus 2.2 per cent in 2007 – soaring commodity prices and a resulting cooling of global growth.

The moderation in growth results from the persisting turmoil in the financial markets, the marked slowdown in the United States and soaring commodity prices, all of which are taking their toll on global activity. The EU economy is holding up relatively well thanks to sound fundamentals and is expected to create 3 million new jobs in 2008-2009 on top of the 7½ million in 2006-2007. But consumer price inflation is expected to surge temporarily to 3.6 per cent this year in the EU against 2.4 per cent in 2007 due to soaring energy and food prices, before coming down to an expected 2.4 per cent in 2009 ( equivalent figures for euro area are 3.2 per cent and 2.2 versus 2.1 per cent in 2007).

Headline inflation increased significantly since the autumn to reach 3.8 per cent in March, in annual terms, in the EU (3.6 per cent in the euro area). This reflects a sharp increase in global energy and food prices partly cushioned by the stronger euro. In view of this, the commission is now forecasting average inflation this year at 3.6 in the EU and 3.2 per cent in the euro area. After peaking in the second quarter of 2008 in the EU, inflation is nevertheless expected to come down to lower levels to 2.4 in 2009 on average (2.2 per cent in the euro area).The commission assumes that uncertainty about the size and location of credit losses will prevail until the end of this year, before gradually petering out during the first half of 2009. The EU economy is still in a relatively good position to weather the global headwinds on the back of improved fundamentals in the absence of macroeconomic imbalances and healthy public finances. Both the average public deficit and current account position were below one per cent of GDP in 2007, even though differences across Member States remain large.

However, the EU economy will not escape unscathed. Investment growth is weakening due to a cooling-off of overvalued housing markets and the cyclical slowdown. Private consumption growth is also set to slow with employment and real wage growth decelerating this year and consumer confidence in steady decline. Following on the strong improvement in 2006-2007 momentum, the labour market is now softening and employment growth is expected to be halved this year, down from 1.7 in 2007 to 0.8 this year and 0.5 per cent next.

The unemployment rate should bottom out at 6.8 per cent in the EU this year (7.2 per cent in the euro area). Despite the easing in the labour market situation, wage growth is expected to accelerate from 2.9 in 2007 to 3.8 per cent this year, temporarily boosted by some catching-up measures in e.g. Germany, before decelerating again to 3.5 per cent next year.