U.S. Economic Downturn May Affect IMF's Increased Global Growth Forecasts

(Source Article: IMF Ups Glogal Growth Forecast, But Report Warns that Inflation Pressures and slower economic growth in U.S. could Reduce Pace of Increase)

During yesterday’s portion of IMF’s meetings in Singapore, IMF announced that the global economy is set for another year of strong growth. However, rising inflation and a U.S. economic downturn posed dangers for the global economy.

In April, the IMF predicted global growth to be 4.9 percent for 2006. Today, the IMF forecasts 2006 global growth to be as much as 5.1 percent. Forecasts for global growth in 2007 also increased from 4.7 percent to 4.9 percent. However, the IMF recognizes that there is a one in six chance that the global growth of 2007 could fall to 3.25 percent.

Although the IMF recognizes that the U.S. economy is slowing, it says that stronger growth in Europe and emerging economies should offset the downturn. Germany’s economy is extremely strong. Japan’s economy should continue to expand, and Asia’s outlook is for strong growth of 8.3 percent in 2006-07.

However, the U.S. economic downturn is a real concern. IMF originally estimated U.S. growth to be 3.4 percent in 2006, but that estimate is now at 2.9 percent. According to IMF chief economist Raghuram Rajan, “[w]e know the United States is slowing but we don’t know how much, partly because a lot of it is dependent on the housing market and those links with the rest of the economy.” Rajan further notes that “[t]he United States has been so central to world growth, it is hard to know how much of world growth outside is autonomous of the United States.”

Questions:

1. How much of an effect do you think the U.S. housing market will have on the projected global economic growth?

2. Will European and Asian growth be able to compensate for the downturn in the U.S.?