The Wall Street Journal-20080130-IMF Predicts Slower U-S- Growth With Global Drag

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IMF Predicts Slower U.S. Growth With Global Drag

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WASHINGTON -- The U.S. will skirt a recession this year, the International Monetary Fund predicted, yet American growth will slow sharply enough to drag on economies around the world.

In its latest forecast, the IMF said U.S. economic growth will slow to 1.5% in 2008 from 2.2% last year. Largely as a result, the IMF expects world-wide growth to decline to 4.1% this year from 4.9% in 2007. That means, in essence, that the problems caused by the U.S. housing slump and meltdown in the market for subprime mortgages are radiating globally.

The IMF's chief economist, Simon Johnson, said the theory that developing-country economies were sufficiently powerful that they had "decoupled" from the U.S. and Europe is "greatly exaggerated."

Problems in the U.S. housing market have led to a credit squeeze in the U.S. and in Europe. Economic slowdowns in those rich countries will mean fewer imports from developing nations, the IMF said. The result: growth will sag around the world.

In the 15-nation euro zone, the IMF expects 2008 growth of 1.6%, down from 2.6% in 2007; Japanese growth will reach 1.5% in 2008, it said, down from 1.9% last year. The IMF figures are adjusted for inflation.

The pattern is the same in developing markets, though growth rates there are expected to be far higher than in wealthy nations. Emerging markets are expected to grow 6.9% this year, down from 7.8% in 2007. China's growth will decline to 10%, the IMF forecast, from 11.4%, while Latin America's will slow to 4.3% from 5.4%.

The only exception is Africa, which is benefiting from the commodity boom and a wave of economic reform, and which is starting from a far lower base of development. The IMF forecast 2008 growth in Africa rising 7%, up from 6% in 2007. Even so, the IMF had forecast in October that Africa would grow somewhat faster in 2008 than it now expects -- a reflection of the slowing global economy.

The IMF significantly marked down its forecast of 2008 growth since its October 2007 predictions. Then, the fund took note of the financial turmoil in the U.S. but said it expected global growth to "remain at a buoyant pace." At the time, the IMF predicted 4.8% global economic growth. That was subsequently recalculated to 4.4% because of a change in the way the national economies are measured.

Now, the IMF has marked down its predictions of growth almost across the board. The IMF expects the U.S. to grow 0.4 percentage point slower in 2008 than it had previously estimated. It reduced the euro zone's 2008 growth forecast by 0.5 percentage point and its projection for emerging markets by 0.2 percentage point.

In a change from its usual public forecasts, the IMF highlighted the severity of this year's expected slowdown by also comparing the 2008 fourth quarter to the year-earlier quarter. By that the measure, the U.S. economy is expected to grow just 0.8% -- and between 0.2 and 0.3 percentage point of that is expected to come from an economic-stimulus package now under debate in Congress.

Mr. Johnson said the stimulus package would play a positive role, so long as it was temporary. In the longer term, he said, the U.S. needed to reduce its budget deficits.