KEY POINTS:
The world economy will slow over the next couple of years as the worst financial crisis since the Great Depression pushes the United States into recession, the International Monetary Fund says.
But it sees only a one-in-four chance of a global recession like that in 2001-02 or after the Asian crisis.
"The greatest risk comes from the still-unfolding events in financial markets," the IMF says in its World Economic Outlook. It forecasts world economic growth to be 3.7 per cent this year and to continue at about the same pace next year.
This would be a slowdown from 4.9 per cent last year and 5 per cent in 2006, but for the past four years growth has been running stronger than its long-run trend.
The financial market crisis has developed into the largest financial shock since the Great Depression, the IMF says. There are clear signs of a broad credit squeeze affecting a wide range of financing, but not yet of a full-blown credit crunch - where the supply of credit is severely constrained across the financial system.
It sees the US economy tipping into a "mild" recession this year with only a gradual recovery in 2009, despite aggressive rate cuts by the Federal Reserve and a fiscal stimulus package.
Activity in the other economies, particularly in Western Europe, will be sluggish this year and next year. It believes the European Central bank could afford to ease monetary policy.
While growth in the emerging and developing countries is expected to slow it should remain above long-term trends in all regions, the IMF says. They have accounted for about two-thirds of world growth over five years. "Trade spillovers from the slowdown in the advanced economies have been limited so far."
It sees sovereign wealth funds as a stabilising force in the global financial market, because they are likely to have longer investment horizons than many private funds. The IMF says the risks to growth from inflation, and the oil market in particular, have intensified despite the slowdown.
"The concern is that persistent inflation in the advanced economies may reduce the room to manoeuvre in response to slowing output and that sustained inflation pressure in rapidly growing emerging economies could require policies to be tightened further."
Oil prices could rise higher unless there is a significant softening in demand in emerging and advanced economies.
"There are also concerns about increasing protectionist sentiment in the advanced economies, particularly in the context of deteriorating labour market conditions."
