WASHINGTON | The global economy should grow soundly this year and next, although the persistence of a credit crunch that has unnerved financial markets worldwide could throw a wrench in the works.
In its latest World Economic Outlook, the International Monetary Fund on Wednesday projected that the global economy would grow by 5.2 percent this year and moderate to 4.8 percent in 2008.
The forecast for this year -- which didn't change from a projection issued in July -- would be slightly slower than last year's brisk 5.4 percent global growth.
However, the forecast for next year was downgraded by almost one-half percentage point from the summer outlook, reflecting the expected toll of financial market strains.
"The financial turmoil that began this summer has certainly been a test for markets, and the consequent tightening of financial conditions will have an impact on global growth in the coming quarters," said the IMF's chief economist, Simon Johnson. "Underlying fundamentals remain sound, and global growth should remain strong, but I would emphasize there are serious risks ahead," he warned.
The main risk, cited by the IMF, centers around the concern that "financial market strains could deepen and trigger a more pronounced global slowdown."
The gradual slowing currently envisioned comes as the world economy's biggest player -- the United States -- is facing a considerable loss of speed.
The IMF lowered its forecast for U.S. growth, predicting the economy would expand by just 1.9 percent this year and next, reflecting the impact of the worst housing slump in 16 years and the effects of the credit crisis.
If the IMF's forecast for this year proves correct, it would be the weakest growth the U.S. has logged in five years.
Although "risks of a recession have risen" in the United States, the IMF said the more likely outcome would seem to be a "more prolonged period" of subpar growth. "A still-healthy employment picture has eased fears of a sharper slowdown," Johnson said.
For the United States and the world economy alike, much hinges on how long it takes for global financial markets to recover from a credit crisis.
The IMF's forecast, issued ahead of the IMF-World Bank annual meetings this weekend, is based on the assumption that the markets gradually will mend in the coming months and return to more normal conditions.
"Nonetheless, there remains a distinct possibility that turbulent financial market conditions could continue for some time," the IMF said. "An extended period of tight credit conditions could have a significant dampening impact on growth, particularly through the effect on housing markets in the United States and some European countries," the IMF said.
In Europe, the IMF is projecting economic growth in Germany to slow to 2.4 percent this year and then 2 percent next year. Britain should see growth pick up to 3.1 percent this year and slow to 2.3 percent in 2008.
The decline in the value of the dollar compared to the Euro has given some Europeans companies heartburn. It makes European goods more expensive in the United States. Thus far, the depreciation of the dollar "has been orderly and has not caused major disruptions," Johnson said.
Japan, meanwhile, is expected to see growth slow to 2 percent this year and then 1.7 percent next year.
Global powerhouse China is projected to log blistering growth of 11.5 percent this year and 10 percent in 2008. The IMF again called on China to let its currency rise in value, which would make its goods more expensive on world markets. The United States keenly supports such a move as it faces a record-high trade gap with the country.
Three countries -- China, India and Russia -- "have accounted for one-half of global growth over the past year," the IMF said.
Another risk to the global economy comes from gyrating oil prices. In the United States oil surged to $87.61 a barrel, setting a new closing high on Tuesday.
If skyrocketing oil prices were to fan inflation pressures, it would complicate the job of Federal Reserve Chairman Ben Bernanke and other central bankers who are dealing with slower economic growth or other fallout from the tight credit situation.
So far, central bankers are doing a "good job" on this front, Johnson said.
