Global economic expansion to slow down

Thursday, 18 October 2007, 07:00 Hrs
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Washington: The global economy will slow its continued expansion due to the recent financial turmoil trigged by the U.S. sub prime mortgage difficulties, according to the World Economic Outlook released by the International Monetary Fund (IMF).

"Credit conditions have tightened as increasing concerns about the fallout from strains in the US sub prime mortgage market led to a spike in yields on securities collateralised with such loans as well as other higher-risk securities," said the report released Wednesday.

Uncertainty about the distribution of losses and rising concerns about counter party risk saw liquidity dry up in segments of the financial markets, it said.

The global economy is projected to grow by 5.2 percent in 2007 and 4.8 percent in 2008. The latter forecast is 0.4 percentage points lower than previously expected.

The largest downward revisions to growth are in the US, which is now expected to grow 1.9 percent in 2008, in countries where spillovers from the US are likely to be largest, and in countries where the impact of continuing financial market turmoil is likely to be more acute.

The IMF has cut its growth forecast for Canada to 2.3 percent from the earlier 2.8 percent. The euro zone is expected to post a growth of 2.1 percent in 2008, down from the 2.5 percent forecast earlier.

"The balance of risks to the baseline growth outlook is clearly on the downside," warned the report. "While the underlying fundamentals supporting growth are sound and the strong momentum in increasingly important emerging market economies is intact, downside risks emanating from the financial markets and domestic demand in the US and western Europe have increased."

Emerging markets have also been affected, although by relatively less than in previous episodes of global financial market turbulence, and asset prices remain high by historical standards, the report added.

China would continue its fast expansion in 2007 and 2008 from its very high growth rate in 2006. Its economy is expected to grow 11.5 percent in 2007 and 10 percent in 2008.

India is expected to expand 8.9 percent this year and 8.4 percent next year. Russia will continue to grow robustly at seven percent this year and moderate to 6.5 percent next year. China, India and Russia have accounted for half of the global growth over the past year, said the IMF.

The global credit squeeze would test the ability of the global economy to continue expanding at recent rates, said the IMF in the analytical chapters of its World Economic Outlook released recently, adding there was plenty of evidence that the global economy remained durable.

But the Washington-based agency also warned that policymakers should not take for granted that the economic stability would continue.

"At the same time, until this summer, financial conditions have been generally benign and private capital flows have been relatively stable," said the analytical report. "But it would be unwise to assume that the present expansion will continue indefinitely.

"The recent period of financial turbulence, if anything, has been a reminder of the shocks (negative and positive) that can occur and spread in ways not fully anticipated," the report added.
Source: IANS
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