Reasons behind slower world growth in 2008
IMF Chief Economist Simon Johnson told a press briefing that a benign financial environment had built up a sizeable “underbrush” of risky loans, relaxed lending standards, and high leverage in certain areas. When problems ignited in the U.S. subprime mortgage market, the fire “jumped” in somewhat surprising ways to other areas.
“In other words, at least three important `fire breaks’—that should have limited the impact of the crisis in U.S. subprime mortgages—did not hold,” Johnson said. He stressed, however, that some important firebreaks did hold. “There was relatively little impact on U.S. investment grade corporate bonds. More broadly, the financial problems did not spread seriously to emerging market and developing countries.”
Robust expansions
Before the turbulence erupted in August, the global economy had been expanding vigorously, with growth running above 5 percent in the first half of 2007, according to the WEO. China’s economy gained further momentum, growing by 11½ percent. India also continued to grow very strongly at more than 9 percent, and Russia grew by almost 8 percent.
These three countries alone had accounted for one-half of global growth over the past year. Robust expansions also continued in other emerging market and developing economies, including low-income countries in Africa.
Rapid growth in the emerging markets counterbalanced continued moderate growth of about 2¼ percent in the United States in the first half of 2007, as the housing sector continued to exert considerable drag. Among the advanced economies, growth in the euro area and Japan slowed in the second quarter of 2007 after two quarters of strong gains.
Solid growth ahead despite turmoil
The IMF expects healthy growth to continue into 2008 (see table), with emerging market economies continuing to serve as the main growth engine of the world economy (see chart).
According to the latest forecast, global growth would slow from 5.2 percent in 2007 to 4.8 percent in 2008, down from the 5.4 percent rate registered in 2006. The largest downward revisions to growth are in the United States, and in countries where financial and trade spillovers from the United States are likely to be the largest.
In the United States, growth is now projected to remain at 1.9 percent in 2008, the same rate as in 2007 and a markdown of almost 1 percentage point compared to the IMF’s previous More at IMF
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