IMF warns demand slowing, inflation rising

The International Monetary Fund revised up estimates it made in April for global growth this year and next, but coupled it with stark warnings that demand was slowing sharply in major industrial economies and inflation rising everywhere.

In an update of its April projections for the world economy, the IMF said growth is set to slow to 4.1 per cent in 2008 from five per cent in 2007 and ease further in 2009 to 3.9 per cent.

But those estimates were better than it foresaw in April when it predicted that world growth would slow even more steeply to 3.7 per cent in 2008 and 3.8 per cent in 2009.

Explaining the revisions in IMF estimates, chief economist Simon Johnson said the effects of turmoil stemming from a US subprime lending crisis were still filtering through the global economy, at a slower rate than previously expected.

He said a US fiscal stimulus package was also cushioning spending by American consumers, at least temporarily. The IMF now estimates the US economy will expand 1.3 per cent in 2008, rather than 0.5 per cent estimated in April. It said 2009 growth would be 0.8 per cent instead of 0.6 per cent.

But it stressed key problems were on the horizon.

"The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere, notably in emerging and developing countries," the IMF said.

Mr Johnson said the IMF still believed there was a chance the world economy could hit a recession. In April the IMF warned there was a 25 per cent chance that world growth will drop to three per cent or less, a level that would be considered recessionary.

"Roughly the risks remain the same but the situation has become considerably more complicated since April because of the inflation problem," Johnson said.

He said financial market conditions were still very fragile and not likely to improve anytime soon. The IMF is scheduled to release its quarterly report on financial market stability on July 28.

He said the problems with US mortgage giants Fannie Mae and Freddie Mac, whose share prices tumbled last week amid worries they may lack capital to weather the crumbling housing market, were emblematic of deeper market problems.

"In the recent past, the global economy has managed to take large shocks in stride but we think its capacity to absorb them is being increasingly challenged," Johnson said. The IMF warned that inflation was mounting everywhere but rising faster in emerging and developing economies.

It slightly revised up growth forecasts for emerging and developing economies to 6.9 percent in 2008 and 6.7 per cent in 2009, a significant slowing from eight per cent in 2007. China's economy was now expected to slow to around 10 per cent from about 12 per cent in 2007, the fund said.

In emerging economies, higher interest rates and more fiscal restraint are needed, and in some cases countries should allow their currencies to appreciate to contain inflation, the IMF said.

The case for raising interest rates in major advanced economies was less compelling, the fund said, given that inflation expectations and labour costs are expected to remain well anchored as growth weakens. Still, it said inflationary pressures need to be closely monitored.

Mr Johnson said it was a difficult time for policy-makers in almost every country "trapped between trying to address the (economic) slowdown and trying to contain the inflation".

The IMF raised its growth estimate modestly for the euro-area countries to 1.7 per cent from an April projection of 1.4 per cent. It maintained its forecast for 2009 at 1.2 per cent.

In Japan, growth is expected to hover slightly below potential at 1.5 per cent this year and next.

The IMF said oil and food prices are expected to remain high and volatile, with financial conditions temporarily adding to upward price pressures.