China, India to drive growth as credit crisis gains momentum

China, India to drive growth as credit crisis gains momentum

New York: The world economy, buffeted by the credit crisis gripping financial markets, is expected to keep expanding in 2008—albeit at a slower pace—with little fear of recession. But unlike past economic upswings driven by the US, Japan and Western Europe, the main engines of growth this time are predicted to be China, India and other emerging economies.

In its latest World Economic Outlook, the International Monetary Fund (IMF) projected that global economy would grow by 5.2% this year and moderate to 4.8% in 2008, compared with last year’s 5.4% growth. The 2008 forecast was downgraded by nearly half a percentage point from the summer outlook, reflecting the turbulent conditions in financial markets.

“Risks to the outlook, however, are firmly on the downside, centred around the concern that financial market strains could deepen and trigger a more pronounced global slowdown," IMF warned. Inflation pressures, volatile oil markets and the strong flows of foreign currency into emerging markets are also threats, it said.

IMF said the ongoing turbulence in financial markets and a new rise in oil prices have dampened the outlook since its October update. In particular, the US growth outlook has become riskier, IMF’s first deputy managing director John Lipsky said in an interview posted on the Fund’s website on 11 December.

The global oil markets remain tight, and with limited spare capacity, supply shocks or heightened geopolitical concerns could trigger higher inflation, economists said. There is room for some cheer, though.

“The good news is that emerging and developing countries weathered the recent financial storm and are providing the basis for strong global growth in 2008," said IMF chief economist Simon Johnson.

“For the first time, China and India are making the largest country-level contributions to world growth," he said.

Emerging Asia is forecast to expand 9.2% this year and 8.3% in 2008; Africa is to grow 5.7% and 6.5%, and West Asia, supported by high oil prices and robust domestic demand, is projected to expand 5.9% in both 2007 and 2008.

IMF raised its growth forecast for China’s economy this year to 11.5% from 11.2%, and said Beijing’s efforts to cool the boom would be more effective if currency controls were eased. However, it said that easing may not materialize unless the authorities act more decisively and let the yuan’s exchange rate rise faster.

Economic growth in the 30 industrialized economies of the Organization for Economic Cooperation and Development (OECD)—which include the US, Britain, Germany and France—will slow to 2.3% in 2008 from 2.7% in 2007, the Paris-based think tank predicted in early December.

“Although near-term growth has been revised down virtually everywhere in the OECD area, the baseline scenario ... is actually not that bad in view of the recent shocks," said Joergen Elmeskov, the acting economic chief of the think tank.

IMF lowered its forecast for US growth, predicting the economy would expand by just 1.9% this year and next, reflecting the impact of the worst housing slump in more than two decades and the effects of the credit crisis. If the IMF’s forecast for 2007 is correct, it would be the weakest growth the US has logged in six years.

The housing slump would cost the US economy a full percentage point of growth this year or one-third of the typical 3% annual rate of increase, economists said.

A November survey by 50 professional forecasters of the Washington-based National Association for Business Economics (Nabe) trimmed the estimates for all the major US economic sectors next year, with the exception of net exports and government spending, without predicting a recession.

In other economic predictions: The West Asian economies, supported by high oil prices that hit a trading record of $99.29 (Rs3,912) a barrel on 21 November, are projected to expand by 5.9% in both 2007 and 2008, with growth accelerating in Iran and Egypt.

Many African economies appear to be growing at the fast and steady rates needed to put a dent in the region’s poverty and attract global investment, the World Bank said. Overall growth in Sub-Saharan Africa is projected to rise from 5.7% in 2006 to 6.1% in 2007 and further to 6.8% in 2008.