Credit crunch 'hits world growth'

Business Materials 25 September 2007 00:12 (UTC +04:00)

( BBC ) - The International Monetary Fund (IMF), which supervises the world financial system, says an economic slowdown is likely due to the global credit crunch.

The IMF warned in its global stability report that the "downside risks [to growth] have increased significantly".

IMF Managing Director Rodrigo Rato said that the biggest impact of the crisis will be on the US economy in 2008.

His comments came soon after a former Federal Reserve chairman said there was a 50% chance of a recession in the US.

"We're heading towards a slowdown," Alan Greenspan said on Sunday. "Whether that actually leads to a recession is dependent on things we can't forecast at this moment."

World growth slowdown

The IMF said that even if credit markets recover, the turbulence may have "far reaching and significant" consequences.

While world economic growth should remain high next year- driven by the buoyant Asian economies - it will be lower than the levels of 2006 and 2007, said Mr Rato.

The longer financial markets remain in crisis, the greater the risk of a further slowdown, he added - and the strong euro could be a particular problem.

The IMF will publish its world economic forecast next month, but some independent forecasters have suggested that the US economy might only grow by 1% to 1.5% next year, half its current rate, while the UK could slow to between 1.5% and 2%, compared to the 2.8% expected this year.

Credit turmoil

The IMF report says that the collapse of credit markets, and concerns about the location and size of potential losses, "has led to disruptions in some money markets and funding difficulties for a number of financial institutions".

And it warns that despite the "extraordinary" injection of cash by central banks to ensure the orderly functioning of markets, "the potential consequences of this episode should not be underestimated and the adjustment process is likely to be protracted".