The IMF latest update on global economic prospects for 2008 and 2009 reveals slowdown in economic growth globally. The IMF lifted growth forecasts modestly for the world including the United States but said the global economy is in a “tough spot” due to rising inflation amid a slowdown. The IMF has made modest upward revisions for the United States, the eurozone, Japan and China, but suggested that the small gains in output still reflect a slowing from 2007 levels and may be overshadowed by inflation pressures. The IMF chief economist Simon Johnson still fear chance of a global recession, which many economists define by global growth below 3.0 per cent. The situation has become more complicated since April because of the inflation problem.

The global growth is now projected to moderate from five per cent in 2007 to 4.1 in 2008 and 3.9 per cent in 2009. On a fourth-quarter-on-fourth quarter basis, the growth would decelerate from 4.8 in 2007 to three per cent in 2008, before picking up to 4.3 per cent in 2009. Growth for the United States in 2008 would moderate to 1.3 per cent on an annual-average basis, an upward revision to reflect incoming data for the first half of the year. Nevertheless, the economy is projected to contract moderately during the second half of the year, as consumption would be dampened by rising oil and food prices and tight credit conditions, before starting to gradually recover in 2009.

Growth projections for the euro area and Japan show a slowdown in activity in the second half of 2008. Expansions in emerging and developing economies are expected to lose steam. Growth in these economies is projected to ease to around seven per cent in 2008-09, from eight per cent in 2007. In China, growth is now projected to moderate from near 12 in 2007 to around 10 per cent in 2008-09. For the 15-nation eurozone, the new IMF 2008 projection calls for growth of 1.7 per cent, 0.3 percentage points more than it saw in April. The 2009 outlook was held at 1.2 per cent growth. For Britain, the IMF also slightly raised its estimate to 1.8 per cent for 2008 from 1.6 per cent.The IMF revised up its forecast for France to show growth of 1.6 per cent (from 1.4) and Germany to two per cent (from 1.4).

Inflation is mounting in both advanced and emerging economies, despite the global slowdown. In many countries, the driving force behind higher inflation is higher food and fuel prices. Oil prices have risen substantially above previous record highs in real terms, driven by supply concerns in the context of limited spare capacity and inelastic demand, while food prices have been boosted by poor weather conditions on top of continued strong growth in demand. In advanced economies, headline inflation rose to 3.5 per cent in the 12 months to May 2008, and, while core inflation remained at 1.8 per cent, central banks have expressed growing concerns.

The increase in inflation is more marked and broader in emerging and developing economies, where headline and core inflation have risen to 8.6 per cent and 4.2 per cent, respectively, the highest rates since around the beginning of the current decade. In these economies, food and fuel make up a larger share of consumption baskets and sustained strong growth has tightened capacity constraints. Looking forward, in advanced economies, inflationary pressures are likely to be countered by slowing demand and, with commodity prices projected to stabilize, the expected increase in inflation for 2008 is forecast to be reversed in 2009.

In emerging and developing countries, inflationary pressures are mounting faster, fueled by soaring commodity prices, above-trend growth, and accommodative macroeconomic policies. Hence, inflation forecasts for these economies have been raised by more than 1.5 percentage points in both 2008 and 2009, to 9.1 and 7.4 per cent, respectively. Based on the latest trend, the IMF said the top priority for policymakers is to head off rising inflationary pressure, while keeping sight of risks to growth. The new projection is based on incoming data for the first half of the year, the IMF said, while indicating a recession remains possible for the US economy.

According to the Fund report, financial risks remain elevated, as rising losses in the context of a global slowdown could add to strains on capital and exacerbate the squeeze on credit availability. Moreover, inflation is a rising concern and will constrain the policy response to slower growth. On the positive side, demand in advanced and emerging economies might be more resilient than projected to recent commodity price and financial shocks, as was the case during the first quarter of 2008. Risks related to global imbalances also remain a concern. The continued decline in the U.S. dollar and slower U.S. economic growth relative to its trading partners, have put the current account deficit on a more sustainable trajectory.

East Asia

The economic outlook for East Asian countries remains favorable, but this outlook is subject to a number of downside risks. Countries in the region are vulnerable to a continued acceleration in inflation tied to higher food and fuel prices, the possibility of a sharper-than-expected slowdown among the high-income countries, and a potential deterioration in global financial conditions. Surging rice and commodity prices in the region are posing a risk of social unrest and higher production costs. Inflation is fueled by surging international food prices compounded by domestic shortfalls because of severe weather in the beginning of 2008.

Combining the effects of higher food prices with those of additional increases in oil and metals prices, the region could experience an aggregate income loss of approximately 1 per cent of GDP in 2008. A slowdown in the United States more severe than projected would exacerbate the slowdown in East Asian and Pacific exports and the moderate slowing of growth anticipated in the baseline. But the impact of a slowing US economy will take time to flow through trade and financial channels.

The Asian Development Bank projects economic growth in emerging East Asia would moderate in 2008 and 2009 as the region weathers a global economic slowdown, higher-than-expected inflation and global financial markets volatility. Emerging East Asian economies are forecasted to grow at a moderate rate of 7.6% in 2008 and 2009, down from 9% in 2007. The bank had projected 8% growth for 2008 in December. The Chinese economic expansion is expected to slow to 9.9 in 2008 and 9.7 per cent in 2009 from a strong growth of 11.9 per cent registered in 2007 on the back of a gradual appreciation of the yuan, tightening policies and weakening external demand.

Further, the growth in members of the Association of South East Asian Nations, or ASEAN is predicted to ease by one percentage point to 5.5% in 2008. In recent months, the monetary authorities have started tightening measures to douse inflationary pressures. However, due to country specific constraints and weak global economic outlook, these nations remained ‘behind the curve’. In order to anchor future inflationary expectations, authorities need to avoid second-round price effects. The gradual pace of currency appreciation led to expectations of further appreciation and triggered speculative capital inflows, adding more inflationary pressures.

Inflation is forecast to climb to 6.3 per cent, more than double the average inflation rate for the last ten years. The ADB warned that core inflation, which excludes food and energy costs, also showed rising trend signaling that a broad based second-round price effect may be underway. Rising inflation is a serious threat to the region’s sustained, strong growth as high import costs of food and fuel threaten to trigger a price/wage spiral. The ADB recommended that economies with healthy fiscal positions could design fiscal support to cushion the poor, but administrative controls through subsidies and price-fixing to tame inflation would add to problems later.

The latest data from the region indicate that the momentum of output and trade remains strong and that the underlying trend rate of growth is not driven by year-to-year fluctuations in world demand, but rather by fundamentals like improvements in productivity, innovation, quality control, education, and skills, all of which are unlikely to be affected by the financial turmoil or by a slowing global market. Although risks have increased in the context of slowing global economies, medium-term economic prospects for the East Asia and Pacific region remain strong.

Despite the softening trend, overall GDP growth is still significant and higher than in other developing regions. Lower export growth will be one of the main factors sending output gains lower. Export growth is expected to continue to temper into 2008 and early 2009 as the decline of exports to the United States is compounded by a slowdown in the European Union and Japan. The contribution of net exports to GDP growth for the region softens from 3.5 points in 2007 to 1.2 points by 2010.

In China while the uncertain global outlook may slow exports, the country’s growth is expected to remain robust, as domestic demand plays a significant and growing role in the economy, and Chinese exporters are able to seek alternative markets to the United States. GDP growth is projected at 9.4 per cent for 2008, a substantial 2.5 percentage points lower than in 2007. As external demand is anticipated to pick up in 2009 and 2010, the pace at which China’s growth slows should moderate to 9.2 and nine per cent, respectively. Growth in other East Asian countries is projected to slow to 5.8 in 2008 before picking up to 6.2 in 2009 and 6.3 per cent in 2010.