Global Economic Outlook in the Monitor
co-written with RGE Lead Analysts
Today we focus on the global economic outlook – prompted by the World Economic Outlook publication of the International Monetary Fund that will be out today and by this weekend’s Spring meetings of the World Bank, IMF and G7 finance ministers and central bankers. Expect lively discussions about the global economy, currencies, the recent financial turmoil and the necessary reforms of the system of regulation and supervision of financial markets.
The IMF has cut its 2008 outlook for global economic growth for the second time this year, as housing and credit problems in the U.S. – possibly the worst financial crisis in the U.S. since the Great Depression – will likely take a serious toll on the global economy. Global growth is expected to reach 3.7% in 2008 – down from the 4.1% forecasted last January. This would mark the lowest level of global growth since 2002. A global recession – defined as global growth at 3% – seems now a possibility (with the IMF giving it a one in four odds). Take a look at: “Global Economic Outlook for 2008: Recession Fears Going Global?”, “Credit Market Meltdown: $1-$2 Trillion Fallout Could Reduce U.S. GDP Growth By 2% in 2008” and “The Rising Risk of a Systemic Financial Meltdown: IMF Expects $945bn Credit Losses”
According to the IMF’s Global Financial Stability Report, published yesterday, “the widening and deepening fallout from the U.S. subprime mortgage crisis could have profound financial system and macroeconomic implications”. The IMF estimates that losses from this financial crisis may be almost as high as $1 trillion. In his economic outlook Fed Chairman Bernanke stated that the economy in first half of the year could even “contract slightly” but growth is set to return to potential, or even slightly above, by next year. The IMF sees real U.S. GDP growth at 0.5% in 2008 and 0.6% in 2009. Take a look at “U.S. Economic Outlook: How Will the U.S. Economy Fare in 2008?”, “U.S. Payroll Numbers Signal Recession: Will the Labor Market Get Gloomier?” and “Housing Finance and Implications for Monetary Policy: Will Central Banks Rescue The MBS Market?”
The Eurozone is expected now to grow 1.3% in 2008 – revised down from the IMF’s 1.6% projected in January. Industrial production remains reasonably strong in Germany and France despite some moderation, but has slowed much more sharply in Spain and Italy. Although growth is moderating the ECB is expected to remain on hold tomorrow in the wake of its inflation concerns. Read: “Will ECB Stay on Hold in April? A Difficult Balancing Act”
As emphasized in the Global Financial Stability Report, “the market turmoil has exacerbated vulnerabilities in a number of emerging markets notably in some countries in emerging Europe that had relied excessively on foreign bank credit or wholesale funding to finance rapid domestic credit expansion”. Check out: “Fast Growth in CEE Area: Will It Continue In 2008?“, “Credit Growth in CEE Countries: Catching Up or Going Too Fast?”
Japan is set to grow at 1.4% in 2008 – revised down from the 1.5% the IMF was forecasting in January. Even as financial contagion into Asian emerging markets has weakened the decoupling hypothesis, the World Bank, Asian Development Bank and UN have lowered their growth forecast for the Asian economies. They note that growing domestic demand, accommodative policies and export demand elsewhere may alleviate the impact of a U.S. recession. Nevertheless, Asia will be vulnerable to slowing export demand in U.S., Europe and Japan, a weakening dollar and contracting global liquidity. Moreover, growing inflation from food and energy prices may prevent rate cuts and pose risks to growth. China and India’s growth estimates have also been revised down due to slowing exports and rising global risk aversion respectively.
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