CHAPTER 1. GLOBAL PROSPECTS AND POLICIES
- International Monetary Fund. Research Dept.
- Published Date:
- April 2008
The global expansion is losing speed in the face of a major financial crisis. The slowdown has been greatest in the advanced economies, particularly in the United States, where the housing market correction continues to exacerbate financial stress. The emerging and developing economies have so far been less affected by financial market turbulence and have continued to grow at a rapid pace, led by China and India, although activity is beginning to moderate in some countries. In the baseline, the U.S. economy will tip into a mild recession in 2008 as a result of mutually reinforcing housing and financial market cycles, with only a gradual recovery in 2009, reflecting the time needed to resolve underlying balance sheet strains. Activity in the other advanced economies will be sluggish in both 2008 and 2009 in the face of trade and financial spillovers. Growth in the emerging and developing economies is also projected to slow, although it should remain above long-term trends in all regions. Risks to the global projections are tilted to the downside, especially those related to the possibility of a full-blown credit crunch, while emerging and developing economies will not be insulated from a serious downturn in the advanced economies. Against this background, policymakers in the advanced economies must continue to grapple with the task of restoring stability to housing and financial markets while addressing downside risks to growth, without jeopardizing inflation performance or longer-term policy goals. Many emerging and developing economies still face the challenge of avoiding overheating or any buildup in vulnerabilities, but policymakers should be ready to respond judiciously to a deteriorating external environment.