Tuesday, January 29, 2008

IMF warns of global slowdown

Source: IMF slashes US growth forecast

In a somewhat expected turn of events, the IMF slashed its optimistic forecast of a US growth and warned that no country is immune from a “global slowdown.” The Fund announced that global growth would fall from 4.7% in 2007 to a mere 4.1% in 2008, an entire 0.3 percentage points lower than its forecast in October. US growth will fall from 2.2% in 2007 to 1.5% in 2008, while the eurozone will slow from 2.6% to 1.6%.

IMF chief economist Simon Johnson said that emerging markets will continue to be an “engine of global growth” but expects that these, too, will slow, with expected growth decreasing from 7.8% in 2007 to 6.9% in 2008. He also stated that “reports of decoupling have been greatly exaggerated” and that because the US slowdown is spilling over into Europe, the fate of linked economies will largely depend on the US. “It is going to be a story of how are you linked to the US and to what extent can your policies deal with the repercussions.” Johnson projects that emerging markets will feel the effects of classic “trade linkages” but will remain insulated from “financial linkages.” European markets, however, will feel the effect of both trade and financial linkages.

Johnson warned that all economies need to remain “alert to signs of a sharper global downturn” and that nations with sound structural positions should be prepared “to apply counter-cyclical policies if conditions warrant.” He defended the European Central Bank’s decision not to cut the interest rate, stating that there was a serious risk that such a cut would result in “second round” effects on wage and prices in the eurozone. In addition, although house prices continue to decline in the UK, Spain and Ireland, he said there is no evidence that these economies will suffer a US-style housing bust in the near future.

Questions for Discussion
1. If the US is unable to avoid an arguably inevitable recession, how extensive is the worldwide ‘ripple effect’ likely to be? To what degree, if any, did the European Central Bank’s decision to stay the interest rate insulate them from the effects of a US recession?

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