Buffeted by recent financial market turbulence and a weakening US performance, the International Monetary Fund (IMF) now sees global economic growth slowing in 2008. The IMF, in its World Economic Outlook Update released yesterday, has pruned the projected world growth to 4.1 per cent from an estimated growth of 4.9 per cent.

The global growth estimates have been trimmed based on new statistical calculations of purchasing power parity (PPP) exchange rates that have been published by the International Comparison Programme (ICP). It might be pertinent to point out that IMF uses PPP exchange rates provided by the ICP as the basis for calculating the relative size of the economies.

According to the IMF report, "downward revisions for PPP-based gross domestic product (GDP) of two of the world's fastest growing economies, China and India, are mainly responsible for the overall reduction of global growth estimates".

Based on revised PPP estimates, China's share of global output in 2007 has now been worked out at 10.9 per cent, down from previous estimate of 15.8 per cent, while India's share has declined to 4.6 per cent from the previous projection of 6.4 per cent. While China remained the second largest economy in the world after US, India remained at the fourth place despite having a sizeable downward GDP adjustment in PPP terms.

However, IMF also said that notwithstanding these changes, "it remains true" that led by China and India, the emerging markets have been the "main drivers" of global economic growth in PPP terms. China, in fact, led the pack as it alone contributed nearly 27 per cent of the global growth in 2007. 

While projecting a growth of a little above four per cent for the global economy during 2008, the IMF said there is a risk that the ongoing turmoil in the financial market would further reduce domestic demand in the advanced economies "with more significant spillovers into emerging markets and developing countries".

According to IMF, financial market strains, originating in the US sub prime sector and associated losses in the banks' balance sheet, have intensified while the recent steep sell-off in global equity markets was symptomatic of rising uncertainty. As a number of other risks remain elevated the "monetary policy faces the difficult challenge of balancing the risks of higher inflation and slower economic activity, though a possible softening of oil prices could moderate inflation pressures."

The IMF's World Economic Outlook Update noted: "Growth in emerging market countries that are heavily dependent on capital inflows could be particularly affected, while the strong momentum of domestic demand in some emerging market countries provides upside potential".

The growth projections for the advanced economies have been reduced significantly. According to IMF, the projected growth in the US for 2008 has been lowered to 1.5 per cent on a year-on-year basis, down from 2.2 per cent in 2007. The growth in emerging markets and developing economies is also expected to ease moderating from 7.8 per cent in 2007 to 6.9 in 2008. "In China, growth is projected to decelerate from 11.4 per cent to 10 per cent, which should help alleviate overheating concerns".

While for the Eurozone area the growth forecast has been lowered at 1.6 per cent in 2008, down from 2.6 per cent in 2007, in case of Japan the growth projection is also lowered at 1.5 per cent on an annualized basis from 1.9 per cent in 2007.

The report pointed out that the emerging markets, led by China and India, continued to expand strongly in 2007 despite some slowing of export growth. Both China and India have benefited from the "surge in domestic demand, more disciplined macroeconomic policy frameworks and from high food and energy prices". 

Referring to global financial stability, IMF said a deeper economic downturn in the US or in any other advanced economies can widen the crisis beyond the sub prime sector, as credit deteriorates more broadly. Though the emerging markets have been resilient so far, but they face "challenges ahead".

"Emerging market equities have outperformed mature equity markets, but prices in some markets have declined steeply since the start of the year (2008) on expectations that the US economy may slow more rapidly. The signs of spillover are more evident in the sharp fall in private emerging market bond issuance, particularly in some emerging European economies whose banks have relied heavily on external financing to support rapid domestic credit growth", the report said.

Stating that the global financial market conditions have worsened with the widening of sub prime mortgage crisis, the report mentioned that the credit and market risks have continued to rise and the "global macro-economic outlook looks less favourable".

According to IMF the main risk to the outlook for global growth is that the "ongoing turmoil in the financial markets would further reduce domestic demand in the advanced economies and create more significant spillovers into emerging markets and developing economies. Growth in emerging market economies that are heavily dependent on capital inflows could be particularly affected", it said.