IMF warning over slowing growth

The global economy may face a marked slowdown next year as a result of the turmoil in financial markets, the International Monetary Fund has warned.
The IMF said the global credit squeeze would test the ability of the economy to continue expanding at recent rates.

While future economic stability could not be taken for granted, there was plenty of evidence that the global economy remained durable, it added.

A sharp slowdown in the US economy is expected to restrain growth next year.

Testing times

The IMF is due to publish revised economic growth estimates for the world's leading economies next week ahead of its annual meeting starting on 20 October.

It had been forecasting global growth of 5.2% next year but unconfirmed media reports suggest this could be downgraded to below 5%.

Remarks from the IMF's World Economic Outlook briefing released ahead of the meeting show policymakers' concerns about the long-term economic impact of the US housing slump and the tightening of credit markets.

"With financial markets around the world now being affected by the fallout from the US sub-prime mortgage difficulties, a broader economic slowdown cannot be ruled out," it said.

The IMF noted that although interest rates had returned to more "neutral" levels in leading industrialised countries, a lack of liquidity in banking markets "may test the strength of the current expansion".

Respected bodies such as the OECD have already cut growth forecasts for the US and major European economies in light of the current instability.

The US cut interest rates by a half a point last month in order to stabilise the economy while the UK officially reduced its annual growth forecast on Tuesday.

In separate remarks, the IMF warned that Eastern Europe was particularly vulnerable to a reduction in capital flows as a result of the global credit squeeze.