In addition to problems within the financial sector, there are two main short-run vulnerabilities for the global economy, both of which the continuing deep correction in the U.S. housing market and the unresolved financial sector problems have led the U.S. economy to the verge of recession. In fact, authors are now anticipating that the United States will indeed slip into recession—meaning that it will experience two or more quarters of negative growth—during the course of 2008, before starting a moderate recovery at some point during 2009.
The effects on the rest of the world are likely to be significant. The IMF has already reduced its expectations for growth in Europe and much of the emerging world. Our revised global growth forecast is 3.7 percent, down from 4.9 percent in 2007, which represents a pronounced slowdown.
However, I would stress that achieving growth even at this level will require that most advanced economies experience only mild slowdowns and that many emerging economies be able to keep their rapid pace of growth largely on track.
In addition to problems within the financial sector, there are two main short-run vulnerabilities for the global economy. All eyes now turn to the world’s leading emerging economies. They have come of economic age in the past half-decade— diversifying their exports, strengthening their domestic economies, and improving their policy frameworks. It is conceivable that their strong momentum, together with some timely policy adjustments, can sustain both their domestic demand and the global economy.
At this moment, however, these emerging economies find themselves beset not by impending recession, but rather by inflation pressures. In particular, the financial dynamics of dollar depreciation and increasing financial market uncertainty have combined with continuing strong demand growth in the emerging economies and sluggish supply responses by commodity producers in such a way as to keep upward pressure on food and energy prices despite the darkening clouds over the global economy.

By: International Monetary Fund (IMF)

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