U.S. slump spreading around the globe, IMF warns
OTTAWA -- Financial turbulence is carrying the U.S. slump to the rest of the world, and now the global economy is in the midst of a serious slowdown, the International Monetary Fund said yesterday.
"It will be very hard for even the most effective countercyclical policy to keep any country from having some slowdown in these circumstances," said the IMF's chief economist, Simon Johnson.
"No one is exempt from a global slowdown. That is why you call it 'global.' "
He was updating the IMF's world economic outlook, which now forecasts global growth of 4.1 per cent this year, after 4.9 per cent for 2007. The forecast is gloomier than three months ago, when the IMF projected global growth of about 4.4 per cent, mainly because the United States is slowing rapidly, and faltering in Europe and Japan.
"The projections for the advanced economies have been reduced significantly," the IMF said.
To drive home its point, the IMF predicted that between the fourth quarter of 2007 and the fourth quarter of 2008, the American economy would expand by just 0.8 per cent, down from 2.6 per cent during the same period a year earlier.
Many economists have sought solace in the strength of emerging markets, but even they won't escape unscathed, the IMF said. As a group, they grew 7.8 per cent in 2007, but will slow down to 6.9 per cent in 2008.
Still, China is expected to remain strong. Growth will decelerate, but from 11.5 per cent in 2007 to 10 per cent in 2008. And that is enough to make sure commodity prices remain buoyant and supportive of reasonable growth in Canada this year, said Stephen Poloz, chief economist at Export Development Canada.
The updates issued yesterday did not go into great detail, giving forecasts only for economic regions. The reports did not mention Canada specifically, but the global and U.S. forecasts would be consistent with Canadian growth of about 2 per cent this year, or less, economists said.
"What we're seeing is the feedback of financial instability into the economy," said Richard Kelly, senior economist at Toronto-Dominion Bank.
Indeed, the IMF warned that if the subprime crisis continues to deepen, things could get a lot worse, both in the United States and in Western Europe.
"A possibly deeper economic downturn in the United States or elsewhere could also serve to widen the crisis beyond the subprime sector, as credit deteriorates more broadly," the IMF said in an update on global financial stability.
The report warned that tight credit conditions will persist, since market players are now worried about far more than structured products wrapped up in subprime loans. Investors are also concerned about the balance sheets of financial institutions and worsening economic conditions, the IMF pointed out. However, the IMF also said it was somewhat comforted by the fact that some banks were raising capital, including from sovereign wealth funds, to bolster their weakened balanced sheets.
The key for countries trying to mitigate the damage is policy, the IMF stressed. Regulators and auditors have to help rebuild confidence among banks. And central banks need to work together more to make sure the liquidity requirements of money markets are met.
"Central banks could usefully review the effectiveness of their tools to reduce market stress - and whether they work globally," the IMF said.
The Bank of Canada joined the U.S. Federal Reserve, the European Central Bank and Switzerland's central bank in injecting liquidity into term money markets in December, to smooth out markets over year-end. But that kind of co-operation has been rare, and is far from institutionalized.
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