IMF sees rosy 2007 global economy
WASHINGTON — The global economy should turn in an energetic performance this year, even though its biggest player, the United States, is expected to experience its weakest growth in five years, according to a new International Monetary Fund forecast.
"By and large things look very good," said Simon Johnson, the fund's top economist.
In its latest World Economic Outlook released Wednesday, the IMF is projecting the world economy to grow by 4.9 percent this year and next. While that would be a moderation from last year's 5.4 percent advance, it would still represent a remarkably healthy showing, analysts say.
The U. S. economy is expected to grow by 2.2 percent this year, which would be the slowest since 2002, when it was recovering from a recession. Last year, the U.S. economy managed to expand by 3.3 percent, a two-year high even as it coped with a painful housing slump.
In its fresh forecast, the IMF downgraded its projection for U.S. growth this year to the current 2.2 percent gain, from a 2.9 percent increase that had been forecast in September.
The reason for the lower projection: "The U.S. housing market downturn in the United States has, if anything, been deeper than projected," the IMF said.
The United States has been dealing with strain from a housing market that started to crumble last year, after a five-year boom.
Although there have been some "tentative signs of stabilization" in the troubled housing sector, the "housing correction still has a way to run," the IMF said. "A turnaround in residential construction is still several quarters away." The U.S. economy should pick up some speed next year, however, and expand by 2.8 percent as the drag from the housing slump eases, the IMF said. That would mark an improved — but still somewhat sluggish — performance, analysts say.
So far, the U.S. housing slump has had little impact on economic activity in the rest of the world.
"Overall, the baseline view remains that difficulties in the housing sector will not have major spillovers," the IMF said.
Still, risks remain.
If the problems in housing were to spread throughout the U.S. economy, forcing consumers and businesses to cut back severely on spending and investment, that could spell trouble, the IMF warned.
And, if problems with risky mortgages were to infect the broader mortgage market and lead to a widespread tightening of credit, the implications would be even more worrisome.
"Such a development could imply a deeper and more prolonged slowdown or even a recession in the United States, with potential spillovers to other countries," the IMF report stated.
Another risk to the global economy is that oil prices will spike again, which could rekindle fears about inflation, the IMF said. Last summer, oil prices surged past $77 a barrel in United States.
However, a bout of turbulence in financial markets in recent months has not undermined the outlook for global growth, Johnson said.
"I don't believe that the financial tail is about to wag the economic dog," he said.
World economic growth is expected to remain solid even in the face of much slower activity in the United States as other countries pick up the slack.
Another global powerhouse, China, is expected to log blistering growth of 10 percent this year and 9.5 percent next year, according to the IMF's forecast. The country's economy expanded by 10.7 percent last year.
India, which grew by 9.2 percent last year, will moderate to 8.4 percent this year. Next year, it will expand by 7.8 percent.
In Europe, the IMF is projecting Germany to expand by 1.8 percent this year, an improvement from a previous projection of 1.3 percent growth. Germany is expected to see growth of 1.9 percent next year. Britain should see economic growth of 2.9 percent this year, also better than the IMF previously thought. Next year, growth in the country should slow a tad and clock in at 2.7 percent.
Russia is expected to see economic activity increase by 6.4 percent this year, compared with 6.7 percent last year. In 2008, Russia's economy is expected to grow by 5.9 percent.
Japan, meanwhile, continues to recover from a decade-long stagnation. It is expected to post economic growth of 2.3 percent this year, up a notch from 2.2 percent last year. Growth should fall back to 1.9 percent next year.
The economies of Canada and Mexico — two neighboring countries more likely to experience "spillovers" from the U.S. economic slowdown — should grow by 2.4 percent and 3.4 percent respectively this year. That's a bit weaker than the IMF's forecast in the fall.
Against this mostly positive worldwide economic backdrop, the IMF urged policymakers to confront longer-term challenges, including aging populations and rising resistance to increasing globalization.
"Policymakers should take advantage of the continuing strong performance of the global economy to press ahead with more ambitious efforts to tackle deep-seated structural challenges," the fund said.
The IMF's outlook will figure into discussions this weekend during the spring meetings of the 185-nation fund and the World Bank. Finance officials from the world's richest countries gather Friday.
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