As forecast last week the International Monetary Fund has downgraded its world economic outlook for 2008 and 2009 because of the spreading influence of the credit crunch, US housing slump and recession.
US, European, British, Japanese and Australian economic growth are expected to lead activity in developed economies lower over the next two years, while the still booming emerging economies like China, Brazil and India will support the world.
The IMF said in the final two chapters of its first of two World Economic Outlooks (WEO) for this year, that global growth is expected to slow to 3.7% in 2008, 0.5% lower than the January WEO update.
In July last year the IMF tipped 5.2% growth for 2008.
At the base of the slowdown the American economy: the IMF forecasts said the US would enter a recession this year with only a "modest recovery" in 2009.
The fund expects Australia to grow by 3.2% this year and 3.1% next year, well above the growth outlook for other advanced economies and also above many local forecasts.
That means some talk here of a recession is misplaced in the extreme and it would be clear that there’s a slowing rising chance of an interest rate cut by the RBA a bit sooner than later (Especially after another fall in consumer sentiment. See below).
Federal Treasurer, Wayne Swan, who leaves today for meetings in Washington with IMF and World Bank officials, said in a statement issued late last night: "It is important that we recognise the severity, duration and possible consequences of the global financial turbulence, but we should also recognise that Australia’s circumstances are more favourable than those elsewhere."
Among other advanced economies, Western Europe is forecast to slow to "well below" its growth potential due to financial strains, trade spillovers and housing downturns in some countries, such as Spain.
The IMF said growth in the 15-nation eurozone is set to drop to 1.4% this year and 1.2% in 2009, down 0.2% and 0.7%, respectively, from the January update. That’s seen as a major blow to the European central Bank, which sees little impact on the eurozone from the US slump.
As if to back up the IMF, figures out overnight showed 4th quarter growth in the eurozone in 2007 fell to 0.4% from 0.7% in the September quarter.
The Japanese economy will not be vibrant: the IMF says the world’s second-largest economy, is poised to slow to an annual rate of 1.4% this year and 1.5% in 2009. Japanese Government and central bank officials this week forecast growth would continue to slow in the country because of high oil prices and the US recession.
But holding the world up will be the emerging and developing countries which have proven more resilient to the problems than thought thanks to domestic growth and the commodity and resources booms.
The IMF said the combined growth of the emerging and developing nations will decelerate to a still-robust 6.7% expansion in 2008, off 0.2 percentage points from the prior forecast, and slip to 6.6% in 2009.
China and India, in particular, will slow, but will still be very strong compared to the rest of the world.
China will have strong growth, expanding at 9.3% this year (compared to 11.4% in 2007)and 9.5% in 2009. That’s down 0.7% and 0.5%, respectively.
India will grow at 7.9% this year, down 0.5%, and 8.0% next year, 0.2% lower than the January update forecast.
The performance of these two emerging giants, and other developing economies, is why Australia will grow relatively strongly this year and in 2009.
The IMF slashed its forecast for UK growth to 1.6% for the next two years, substantially less than what the UK government and the Bank of England have projected for 2009.
A problem to keep in mind and not lose sight of is the surge in commodity prices, especially oil and food. Rice, the staple food in Asia, has doubled in price in a month and is being rationed across the region.
The IMF says that weaker growth is not helping to ease inflation in many economies, holding out the prospect of a return to 1970’s style stagflation.
Prices are rising as the supply of many key commodities remains constrained. At the same time, investors are pulling money out of financial assets to chase metals, oil and food staples, sending prices sharply higher (corn it another record in the US overnight of $US6.05 a bushell in Chicago for the current futures contract).
The IMF also warned that the key remains the extent of the US slowdown. If it worsens from a mild recession into a more intense, and sharper slump of greater duration, world activity could fall below a growth rate of 3%, which the Fund said was tantamount to a global recession. It said there was a 25% chance of this happening.
The IMF said the risks to global growth remain "tilted to the downside," and according to its chief economist, Simon Johnson: "The principal downside risk comes from the possibility that financial strains could deepen. "A negative spiral or ‘financial decelerator’ remains a possibility," he added.
