IMF warns of global slowdown in 2008 due to credit squeeze

The International Monetary Fund has warned that the global economy is likely to face a definite slowdown next year because of the global credit squeeze caused by the turmoil in financial markets, with Eastern Europe particularly vulnerable to a reduction in capital flows as a result of the global credit squeeze.

"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.

A lack of liquidity in banking markets "may test the strength of the current expansion". Even though interest rates had returned to more "neutral" levels in leading industrialised countries.

Tightening credit, the IMF warned, would strain the expansion of the world''s economy, which could not be taken as assured, though the state of the global economy remained durable. (See: IMF warns of long-term effects of global credit market crisis)

Earlier in April, it had raised its world economic growth forecast for 2007 and 2008 to 5.2 per cent, up 0.3 per cent from the 4.9 per cent growth forecast for both years in its World Economic Outlook (WEO), published in April.

The IMF hiked the growth forecast by 0.3 percentage points on the back of robust growth in emerging markets, with China poised to become its most powerful growth driver.

The IMF will unveil its revised economic growth estimates for the world''s leading economies next week, ahead of its annual meeting due to commence from 20 October. According to reports, the IMF plans to bring down its global growth forecast of 5.2 per cent next year to below 5 per cent.

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

The OECD has already cut growth forecasts for the US and major European after the current financial market instability.