Global economy in 'tough spot'

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Global economy in 'tough spot' - IMF

(Agencies)
Updated: 2008-07-18 10:03

WASHINGTON - The IMF on Thursday lifted growth forecasts modestly for the world including the United States but said the global economy is in a "tough spot" due to rising inflation amid a slowdown.

Global output is expected to climb 4.1 percent in 2008, up from its April projection of 3.7 percent, the International Monetary Fund said in an update of its April World Economic Outlook.

But the report also dramatically boosted the inflation outlook.

For 2009, the forecast calls for 3.9 percent global growth, up a notch from its earlier call of 3.8 percent.

IMF chief economist Simon Johnson said there is still "a chance of a global recession," which many economists define by global growth below 3.0 percent.

Johnson said the overall growth picture is "roughly" the same as in April but that "the situation has become more complicated since April because of the inflation problem."

The IMF made modest upward revisions for the United States, the eurozone, Japan and China, but suggested that the small gains in output still reflect a slowing from 2007 levels and may be overshadowed by inflation pressures.

"The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere, notably in emerging and developing economies," the report said.

"Global growth is expected to decelerate significantly in the second half of 2008, before recovering gradually in 2009. At the same time, rising energy and commodity prices have boosted inflationary pressure, particularly in emerging and developing economies."

Based on the latest trend, the IMF said the "top priority for policymakers is to head off rising inflationary pressure, while keeping sight of risks to growth."

The IMF raised its 2008 inflation forecast sharply to 3.4 percent for advanced economies, from its April figure of 2.6 percent. For emerging economies, prices are expected to soar 9.1 percent, up from an earlier estimate of 7.4 percent.

"Inflation is mounting in both advanced and emerging economies, despite the global slowdown," the report said.

The report also said financial market conditions "remain difficult" despite "reduced concerns about a financial meltdown."

It noted that "markets remain fragile amid concerns about losses in the context of slowing economies" and the "extension of new credit will be constrained by the need to repair balance sheets" of major banks hit by the US real-estate crisis.

On the growth front, the IMF said the outlook for the United States, the world's biggest economy, is not as dire as previously projected.

The latest forecast calls for a 1.3 percent expansion in 2008, in the second upward revision in the past month for the United States. In April, the IMF predicted growth of just 0.5 percent but boosted that in June to 1.1 percent.

The IMF maintained its call from last month's update of 0.8 percent US growth for 2009.

The new projection is based on incoming data for the first half of the year, the IMF said, while indicating a recession remains possible for the US economy.

Johnson said the US economy "hasn't stalled," and added that "we don't think there will necessarily be two quarters of negative growth," which is the definition of recession used by many economists.

But Johnson declined to offer a prediction on a US recession, saying that forecast would be made by a US economic research organization.

"The US economy is slowing down, but there should be a modest but significant recovery in 2009," he said.

For the 15-nation eurozone, the new IMF 2008 projection calls for growth of 1.7 percent, 0.3 percentage points more than it saw in April. The 2009 outlook was held at 1.2 percent growth.

In Japan, the IMF added 0.1 percentage points to its 2008 outlook to show 1.5 percent growth.

China's 2008 growth estimate was lifted to 9.7 percent from 9.3 percent and the 2009 estimate was boosted to 9.8 percent from 9.5 percent.

For Britain, the IMF also slightly raised its estimate to 1.8 percent for 2008 from 1.6 percent.

The IMF revised up its forecast for France to show growth of 1.6 percent (from 1.4 percent) and Germany to 2.0 percent (from 1.4 percent).