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Buffeted by recent financial market turbulence and a weakening
Growing risks
While projecting growth of above four percent for the global economy, the IMF said there was a risk that the ongoing turmoil in financial markets would further reduce domestic demand in the advanced economies with more significant spillovers into emerging market and developing countries. "Growth in emerging market countries that are heavily dependent on capital inflows could be particularly affected, while the strong momentum of domestic demand in some emerging market countries provides upside potential," the World Economic Outlook Update said.
A number of other risks remain elevated. "Monetary policy faces the difficult challenge of balancing the risks of higher inflation and slower economic activity, although a possible softening of oil prices could moderate inflation pressures," the IMF said.
The IMF made the following comments and projections for key areas of the global economy:
Economic growth in the
The IMF has said that the recent move by the U.S. Federal Reserve to cut the Federal funds rate by 75 basis points was "appropriate and helpful."
Growth has also slowed in western Europe and confidence indicators have generally deteriorated. For the euro area, growth on an annual basis is projected at 1.6 percent in 2008, down from 2.6 percent last year. On a Q4-Q4 basis, growth is projected at 1.3 percent, compared with 2.3 percent in 2007.
At a January 29 news briefing in
Japanese growth has been dampened by a tightening in building standards, while consumer and business sentiment have weakened.
Emerging markets and developing countries
Despite some slowing of export growth, emerging market and developing countries have thus far continued to expand strongly, led by
Growth in emerging market and developing countries is also expected to ease, moderating from 7.8 percent (annual basis) in 2007 to 6.9 percent in 2008. In
But growth in
Inflation and interest rates
Headline inflation has increased since mid-2007 in both advanced and emerging economies. Core inflation has also drifted upward. In the
PPP basis
The latest IMF projections are calculated using revised purchasing power parity (PPP) data published by the International Comparison Program in December 2007. This has resulted in a downward revision of the previous estimates of global growth during 2005-07 of around ½ percentage point a year relative to the estimates in the October 2007 World Economic Outlook. For additional details see "Global Growth Estimates Trimmed After PPP Revisions."
Financial market outlook
In a separate Global Financial Stability Report Market Update, the IMF said that deteriorating economic conditions could exacerbate pressures on major financial institutions that have already suffered big losses from the subprime crisis.
A possibly deeper economic downturn in the
Already delinquency rates in 2007 vintages of U.S. prime mortgages (those to the most credit worthy borrowers) are rising faster than in previous years, albeit from low levels, and other forms of consumer credit show signs of deterioration (see chart).
In
Lending in some segments of the corporate sector also expanded rapidly in the first half of 2007 with the rise in leverage buyouts. Weaker quality corporates have already seen a substantial rise in the cost of credit although yields investment grade debt have remained relatively stable. Additionally, a slowing economy will likely exacerbate the tighter credit environment further as unemployment picks up and job growth slows.
Emerging markets have been resilient so far, but face challenges ahead. Emerging market equities have outperformed mature equity markets, but prices in some markets have declined steeply since the start of the year on expectations that the