IMF PREDICTS WORST GLOBAL ECONOMIC DOWNTURN IN YEARS

by Abid Aslam

(IPS) WASHINGTON -- The International Monetary Fund (IMF) has again cut its forecast for world economic growth and is bracing for more bad news in rich and poor countries, but it stopped short of using the word "recession" Tuesday.

This year, the global economy will post its weakest performance in five years, the global economic watchdog said in an update to its semi-annual World Economic Outlook report.

The warning comes days after Dominique Strauss-Kahn, the IMF managing director, broke with tradition and asked governments to spend more -- even at the cost of increasing budget deficits, which the agency normally considers a cardinal sin -- to stimulate their economies. Strauss-Kahn cited the severity of the unfolding downturn.

Growth in 2008 likely will slow to 4.1 percent, from 4.9 percent in 2007. This would be the worst performance since 2003, when the world economy grew by 3.6 percent, according to the IMF.

Things could get worse, however.

"The overall balance of risks to the global growth outlook is still tilted to the downside," the fund said. Last October, it predicted 4.4 percent growth for 2008.

The fund blamed its gloomier outlook on the U.S. substandard mortgage crisis and its spillover into world financial markets. It cautioned that growth in the United States, the world's largest economy, could grind down to a negligible 0.8 percent in 2008. It also cut its estimate of 2007 U.S. growth from 2.6 percent to 1.5 percent.

Other wealthy economies already are being dragged down by mayhem in world markets, the IMF said. Emerging markets will fare better but none will come out of the global crisis without scars.

"The revision is mostly accounted for by a weaker outlook for advanced economies," said Simon Johnson, the fund's chief economist. "Growth in emerging markets, the engine of global growth, is expected to generally hold up well, but here too we expect growth to also slow this year."

China and India will lead growth in output, thanks in large measure to strong domestic demand, the fund said, adding that commodity exporters also will reap the rewards of high prices for energy, metals, and food.

High food prices are proving a mixed blessing, however.

"Headline inflation has generally increased across advanced and emerging market countries, reflecting sharp increases in food and energy prices," said Johnson. "In advanced economies, inflation pressures are expected to subside sooner or later as economies slow, although there are serious concerns about possible second-round effects."

"In some emerging market countries, inflation remains a major issue," he added.

Food accounts for a large share of consumer spending in developing countries.

Developing countries also could face greater risks as the financial turmoil unleashed in the United States plays out across the globe.

"The main risk is that the ongoing turmoil in financial markets could further weigh on domestic demand in advanced economies and that a sharper slowdown could then impart more significant spillovers to emerging market and developing countries," said Johnson.

"Emerging market countries that are reliant on capital inflows could be directly affected," he added.

As recently as a few months ago, the IMF urged continued fiscal restraint in the United States and other countries faced with large deficits. In recent days, however, the agency has welcomed a nascent U.S. proposal for some $150 billion in deficit spending as necessary to stimulate the economy and ward off a recession.

Strauss-Kahn, the fund chief, jolted the financial commentariat last week, when he told the World Economic Forum in Davos, Switzerland, that the global financial situation is so severe that lower interest rates alone will not suffice "to get out of the turmoil we are in."

"I don't think we would get rid of the crisis with just monetary tools," he was quoted as saying. "A new fiscal policy is probably today an accurate way to answer the crisis."

The Financial Times described his remarks as "a dramatic volte face."

"Strauss-Kahn's words rip apart a long-standing global consensus that fiscal retrenchment in the U.S. and Japan is needed to help reduce huge trade imbalances," the newspaper said Monday. "It comes as the IMF is due to release new economic forecasts this week which, he said, would show a 'serious slowdown and it needs a serious response.'"

It further quoted Larry Summers, a former U.S. treasury secretary, as saying: "This is the first time in 25 years that the IMF managing director has called for an increase in fiscal deficits and I regard this as a recognition of the gravity of the situation that we face."

Separately, a key committee of the U.S. Federal Reserve, or central bank, began two-day talks Tuesday amid expectations it would announce further interest rate cuts aimed at easing the credit crunch.

Investment bankers and analysts also have been warning that credit cards and consumer loans are next in line for the kind of trouble already spawned by risky U.S. mortgages and associated financial speculation.