IMF Cuts Growth Forecasts

Decoupling seems ever more unlikely…

From the IMF:

Buffeted by recent financial market turbulence and a weakening U.S. performance, world growth is projected to slow to 4.1 percent in 2008, down from an estimated 4.9 percent last year, the IMF said in its quarterly update for the global economy.

Financial market strains originating in the U.S. subprime sector–and associated losses on bank balance sheets–have intensified, while the recent steep sell-off in global equity markets was symptomatic of rising uncertainty, the IMF stated.

Growing risks

While projecting growth of above four percent for the global economy, the IMF said there was a risk that the ongoing turmoil in financial markets would further reduce domestic demand in the advanced economies with more significant spillovers into emerging market and developing countries. “Growth in emerging market countries that are heavily dependent on capital inflows could be particularly affected, while the strong momentum of domestic demand in some emerging market countries provides upside potential,” the World Economic Outlook Update said.

A number of other risks remain elevated. “Monetary policy faces the difficult challenge of blancing the risks of higher inflation and slower economic activity, although a possible softening of oil prices could moderate inflation pressures,” the IMF said.

The IMF made the following comments and projections for key areas of the global economy:

United States

Economic growth in the United States appears to have slowed notably in the fourth quarter of 2007, with recent indicators showing weakening of manufacturing and housing sector activity, employment, and consumption.

U.S. growth is projected by the IMF to slow to 1.5 percent this year, down from 2.2 percent last year, but the update points out that this number for 2008 reflects the carryover from 2007. Projections on a quarterly basis (Q4-Q4) give a better sense of the slowing growth momentum. On this basis, growth is projected at 0.8 percent in the fourth quarter of 2008, compared with 2.6 percent during the same period of 2007.

The IMF has said that the recent move by the U.S. Federal Reserve to cut the Federal funds rate by 75 basis points was “appropriate and helpful.” [Emphasis added — mdc]

The Update is here.

Deutsche Bank revised their forecasts yesterday. They now predict 0% growth in 2008Q1, 1% in Q2.

11 thoughts on “IMF Cuts Growth Forecasts

  1. Steve

    It’s true the NBER decides what a recession is, but they wouldn’t declare one without a single negative quarter. At least they never have before.

  2. calmo

    I suppose that official bit *is* important…esp to those who can derive some comfort from this slowing, to point to that Sign that tells us not to be such wimps, –that this is not an Official Recession.
    Now lets imagine how this economy slows. The upper echelon has more insulation than they know what to do with, but that growing swath of working poor, possibly not enough to remain civil and obedient…not this month or even this quarter, but eventually.

  3. Gray

    Hmm, isn’t this development actually rendering moot Greg Mankiw’s rationale why a stimulus package is unnecessary?

  4. Buzzcut

    If you want to revise the technical definition of recession from 2 quarters of negative growth to something else, you should be forthright and tell us all what that new definition is.
    But subpar growth in the 1% range is not a recession. By that definition we were in a recession in Q1 and Q2 2007. It’s just not so.
    I think that we are in a time of slow growth. That was certainly the case in ’07, probably will be the case in ’08. But recession? Nope.

  5. psummers

    The 2-quarters-of-negative-gdp-growth thingy has never been a “technical definition.” It is a handy rule of thumb, but as Menzie points out, the “technical definition” of a (US) recession is “when the dating committee says so.”

  6. Buzzcut

    I thought that the 2 quarters of negative growth was the metric that the commitee used to say that there was a recession or not.
    Historically that was the case, right? Except for ’01?

  7. JDH

    Buzzcut, the “2 quarters of falling real GDP” has always been a rough rule of thumb rather than anybody’s formal definition. The NBER Business Cycle Dating Committee makes a judgment call based on a number of different indicators. Here at Econbrowser, we will make the call based on our recession probability index. I’ll have the new numbers for that out later today.

  8. Jian

    I think a more problematic argument of “decoupling” theory is that weak dollars plus strong growth in the rest of the world can help the US avoid a slowdown/recession. The logic of this argument depends on what shocks caused the dollar to depreciate. In the case that the recent depreciation is driven by weakening U.S. growth prospects, the ?decoupling? theory is self-contradictory: if the weakening dollar can pull the U.S. economy out of a slowdown, there is no reason for the dollar to depreciate in the first place.

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