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IMF Sees Economic Growth, Warns Of Credit Crisis

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By JEANNINE AVERSA, The Associated Press

Published: October 18, 2007

WASHINGTON - The global economy should grow soundly this year and next, but the persistence of a credit crunch that has unnerved financial markets worldwide could throw a wrench in the works.

In its latest World Economic Outlook, the International Monetary Fund on Wednesday projected that the global economy would grow by 5.2 percent this year and moderate to 4.8 percent in 2008.

The forecast for this year, which didn't change from a projection issued in July, would be slightly slower than last year's brisk 5.4 percent global growth.

The forecast for next year, however, was downgraded by almost one-half percentage point from the summer outlook, reflecting the expected toll of financial market strains. The lower projection would still mark a 'solid' performance, the IMF said.

'Risks to the outlook, however, are firmly on the downside, centered around the concern that financial market strains could deepen and trigger a more pronounced global slowdown,' the IMF warned.

The gradual slowing envisioned comes as the world economy's biggest player - the United States - is facing a considerable loss of speed.

The IMF lowered its forecast for U.S. growth, predicting the economy would expand by just 1.9 percent this year and next, reflecting the impact of the worst housing slump in 16 years and the effects of the credit crisis.

If the IMF's forecast for this year proves correct, it would be the weakest growth the United States has logged in five years.

Although 'risks of a recession have risen' in the United States, the IMF said the more likely outcome would seem to be a 'more prolonged period' of subpar growth.

To cushion the economy from fallout related to the housing and credit problems, the Federal Reserve in September slashed a key interest rate by one-half percentage point to 4.75 percent. Additional rate cuts would be justified if the economy were to show signs of faltering, provided that inflation risks remain contained, the IMF said.

The biggest worry is that housing and credit problems will force people and companies to cut back on their spending, dealing a blow to U.S. economic growth.

For the United States and the world economy, much hinges on how long it takes for global financial markets to recover from the credit crisis.

The IMF's forecast, issued ahead of the IMF-World Bank annual meetings this weekend, is based on the assumption the markets gradually will mend in the coming months and return to more normal conditions.

'Nonetheless, there remains a distinct possibility that turbulent financial market conditions could continue for some time,' the IMF said. 'An extended period of tight credit conditions could have a significant dampening impact on growth, particularly through the effect on housing markets in the United States and some European countries.'

In Europe, IMF projects economic growth in Germany to slow to 2.4 percent this year and then 2 percent next year. Britain should see growth pick up to 3.1 percent this year and slow to 2.3 percent in 2008.

Japan is expected to see growth slow to 2 percent this year and 1.7 percent next year.

Global powerhouse China is projected to log a blistering growth of 11.5 percent this year and 10 percent in 2008.

India should log robust growth of 8.9 percent this year and 8.4 percent next year. Growth in Russia this year should accelerate to a strong 7 percent and moderate to a brisk 6.5 percent next year.

China, India and Russia 'have accounted for one-half of global growth over the past year,' the IMF said.

The economies of Canada and Mexico - two neighboring countries more likely to experience 'spillovers' from the U.S. economic slowdown - should grow by 2.5 percent and 2.9 percent, respectively, this year. Next year, growth in Canada is expected to slow to 2.3 percent, but in Mexico it should edge up to 3 percent.

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