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IMF lowers growth projections with sharp downturn in US

Thursday, September 6th 2007 - 21:00 UTC
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Masood Ahmed, IMF Director of External Relations Department Masood Ahmed, IMF Director of External Relations Department

Global economic growth is likely to be dampened by the turbulence which has swept world markets said a spokesperson for the International Monetary Fund (IMF).

Masood Ahmed said the IMF would be revising down its growth projections - with this year being more affected than 2008. The US would see the largest impact, with some parts of Europe also set to endure lower growth, it added. Uncertainty over the size of losses in the sub-prime lending market has caused stock market turmoil and financial volatility with central banks pumping billions in liquidity. Massod Ahmed said that the unrest came "after an exceptionally long period of benign conditions in international economic markets" and solid global growth, which had provided "a cushion against which we are working". Most emerging economies remained "relatively robust", he added. However, "some countries which had a high dependency on external financing could be vulnerable to fallout on the financial markets". At the end of July the IMF hiked its original forecast of world growth from 4.9% to 5.2% in 2007 and 2008. However for United States the April estimate of 2.2% had been lowered to 2% for 2007, but remained unchanged for next year, 2.8%. But for the Euro Zone the opposite had happened hiking growth to 2.6% in 2007 and 2.5% in 2008. The IMF comments came a day after the OECD warned the US economy would slow sharply in the second half of 2007 with the risk of going into recession not ruled out. The Organisation for Economic Co-operation and Development's World Economic Outlook report is due for release in October. The 30-nation group of top economies said the global financial fallout from the current US sub-prime mortgage crisis would continue for some time. But it said US consumers remained resilient while Europe was unlikely to be as badly affected as the US. The OECD said the contraction in the US housing market and the wider problems in the financial markets it has triggered would have a negative impact on the US economy. It is now forecasting economic growth in the US to fall to 2% in the third quarter and 1.5% in the fourth quarter from the 4% recorded between April and June. "We are looking at a slowdown in the US economy which is quite significant," said the OECD's chief economist Jean-Philippe Cotis. The OECD admitted the recent retrenchment in global credit markets, which has forced central banks in the US and Europe to pump billions into the banking system to enhance liquidity, had taken it by surprise. "What we had not forecast was the extent of the spread of this financial risk beyond the boundaries of the US," Mr Cotis said. The OECD said it expected sub-prime related turbulence to continue for some time and could not fully assess the likely impact of these problems on the wider financial system. Turning to Europe, Mr Cotis said its leading economies were less vulnerable to a housing-led slowdown. This was because their mortgage markets had fewer structural "imbalances" while inflationary pressures were generally lower. As a result, the transatlantic economic impact of a US slowdown would not be as severe as that following the dotcom crisis at the start of the decade. "We don't think there will be the same extent of contagion in Europe as in 2001" stressed Mr Cotis.

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