IMF warns economy in "tough spot"

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IMF warns economy in "tough spot"

17/07/2008 16:42

WASHINGTON (Reuters) - The International Monetary Fund on Thursday revised up estimates it made in April for global growth this year and next but coupled it with stern 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 the pace of growth is set to slow to 4.1 percent in 2008 from 5 percent in 2007 and to ease further in 2009 to 3.9 percent.

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

The IMF said the impact of turmoil stemming from a U.S. subprime lending crisis was still filtering through the global economy and said a U.S. fiscal stimulus package was supporting spending by American consumers, at least temporarily.

The IMF now estimates the U.S. economy will expand 1.3 percent in 2008, rather than the 0.5 percent it estimated in April. It said growth in 2009 would be 0.8 percent instead of 0.6 percent.

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.

The fund said inflation was mounting everywhere but rising faster in emerging and developing economies, driven by higher fuel and food costs.

In emerging economies, higher interest rates and more fiscal restraint were needed, and in some cases more flexibility in exchange rate regimes were necessary, 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 were expected to remain well anchored as growth weakens. Still, it said inflationary pressures needed to be closely monitored.

(Reporting by Lesley Wroughton; Editing by Andrea Ricci.)

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