IMF cuts growth estimates as subprime crisis spreads

30 January 2008

MADRID – The International Monetary Fund on Tuesday slashed its forecast for global economic growth this year in the wake of the fallout from the subprime crisis and warned that the risks to its revised estimates were on the downside.

The IMF lowered its growth prediction for the global economy to 4.1 percent from a previous estimate of 4.4 percent in October of last year, and down from 4.9 percent in 2007. It cut its figure for the US economy to 1.5 percent from 1.9 percent previously and lowered its 2008 growth estimate for the euro by half a percentage point to 1.6 percent.

"Financial market strains originating in the US subprime sector […] have intensified, while the recent steep sell-off in global equity markets was symptomatic of rising uncertainty," the IMF said.

The IMF’s chief economist Simon Johnson sidestepped questions on whether a recession loomed, limiting himself to speaking of a "significant" global slowdown.

He also said it was difficult to say how the changed prospects would affect individual countries such as Spain, where a housing market boom has come to an end. "No one is going to be exempt from some slowdown," Johnson said.

The Spanish government recently lowered its forecast for GDP growth this year to 3.1 percent from 3.3 percent. But the revised figure was still above the IMF’s October estimate of 2.7 percent.

The IMF said that the main risk to its estimates lies in the ongoing turmoil in financial markets further reducing domestic consumption, with credit concerns extending beyond the subprime sector. "The overall balance of risks to the global growth outlook is still tilted to the downside," the report said.

Higher inflation since the middle of last year in the wake of sharp higher oil and food prices also posed a monetary policy dilemma for central banks, the IMF said. "Monetary policy faces the difficult challenge of balancing the risks of higher inflation and slower economic activity, although a possible softening of oil prices could moderate inflation pressures," the report said.

Johnson backed the US Federal Reserve’s decision to cut interest by 1.75 percentage points since the summer of last year, and also supported the European Central bank’s decision to keep its rates on hold because of inflation risks.

Subject: Spanish news