(EnergyAsia, January 31, Thursday) — Weighed down by recent financial market turbulence and a weakening US economy, the world economy is projected to grow at a slower rate of 4.1% this year, down from an estimated 4.9% last year, said the IMF in its quarterly update.
Financial market strains originating from the US subprime mess have intensified, while the recent steep sell-off in global equity markets was symptomatic of rising uncertainty, the IMF stated.
The agency 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,” it said.
“Monetary policy faces the difficult challenge of blancing the risks of higher inflation and slower economic activity, although a possible softening of oil prices could moderate inflation pressures.”
It added that US economic growth may have slowed notably in the fourth quarter of 2007, with recent indicators showing weakening of manufacturing and housing sector activity, employment, and consumption.
The IMF projects that US growth will slow to 1.5% this year, down from 2.2% last year, but the update points out that this number for 2008 reflects the carryover from 2007. Projections on a quarterly basis (Q4-Q4) give a better sense of the slowing growth momentum. On this basis, growth is projected at 0.8% in the fourth quarter of 2008, compared with 2.6% during the same period of 2007.
The IMF has described the recent move by the U.S. Federal Reserve to cut the Federal funds rate by 75 basis points as “appropriate and helpful.”
Despite some slowing of export growth, the IMF said emerging market and developing countries have continued to expand strongly, led by China and India. These countries have benefited from the strong momentum of domestic demand, more disciplined macroeconomic policy frameworks, and in the case of commodity exporters, from high food and energy prices.
Growth in emerging market and developing countries is also expected to ease, moderating from 7.8% in 2007 to 6.9% in 2008. In China, growth is projected to decelerate from 11.4% to 10%, which should help alleviate overheating concerns. Growth in Africa is projected to pick up to 7% from 6% last year.