The International Monetary Fund lowered its outlook for global growth in 2008 and predicted a modest U.S. recession on Tuesday, citing pressure to housing and financial markets.
The multi-national organization based in Washington said in its World Economic Outlook Update report that growth worldwide is projected to slow to 3.7 percent this year, half a percentage point lower than its prediction in January and 1 ¼ less than growth in 2007.
The U.S. economy would contract slightly, about 0.7 percent, this year as a result declines in the housing and financial markets before seeing a modest recovery in 2009, with still-below par 1.6 percent growth, as financial institutions resolve problems with their balance sheets.
The biggest risk comes from deeper losses related to the U.S. subprime mortgage market and other sectors which could cause the current credit squeeze to mutate into a full-blown credit crunch.
A top U.S. finance official, Treasury Under Secretary David McCormick acknowledged downside risks but added that the IMF's predictions were unduly pessimistic.
That said we remain positive about the long-term resilience of the global economy, as well as the long-term resilience of the U.S. economy, and we believe that the IMF's latest WEO projections are unduly pessimistic, he noted in a prepared statement ahead of a G-7 meeting of top world economic officials this week in Washington.
The IMF predicted in a separate report yesterday that total losses from the global financial crisis could reach nearly $1 trillion in writeoffs over the next two years. Among the heaviest hit commercial banks was Citigroup which has already secured $40 billion capital to strengthen its balance sheet.
Western Europe would also slow below its potential due to trade spillovers, financial strains, and negative housing cycles in some countries. Housing market troubles for Europe and other advanced economies are a concern to a lesser degree than in the U.S.
Emerging and developing economies would see some easing but remain robust in the next two years, the IMF said. While these economies will likely benefit from domestic demand, they remain vulnerable to trade and financial spillovers. Risks exist from rising inflationary pressures remain due to tight commodity markets.
The IMF added that it sees a 25 percent risk of a global recession in 2008 and 2009, which it describes as growth of 3 percent or less.