April 2 (Bloomberg) -- The International Monetary Fund cut its forecast for global growth this year and said there's a 25 percent chance of a world recession, citing the worst financial crisis in the U.S. since the Great Depression.
The world economy will expand 3.7 percent in 2008, the slowest pace since 2002, according to a document obtained by Bloomberg News at a meeting of Southeast Asian deputy finance ministers and central bankers in Da Nang, Vietnam. In January the fund projected growth of 4.1 percent.
The reduction is the third by the Washington-based lender since last July, when it predicted the world economy would cope with the U.S. credit squeeze and grow 5.2 percent this year. Central banks will need to conduct policy ``as flexibly'' as the circumstances warrant, the statement said, adding that the European Central Bank has room to lower borrowing costs.
``The financial shock that originated in the U.S. subprime mortgage market in August 2007 has spread quickly, and in unanticipated ways, to inflict extensive damage on markets and institutions at the core of the financial system,'' the statement said. ``The global expansion is losing momentum in the face of what has become the largest financial crisis in the United States since the Great Depression.''
`Contract Slightly'
Asked in a Bloomberg Television interview about the IMF's analysis, U.S. Treasury Secretary Henry Paulson said today ``that sounds overblown to me.'' Federal Reserve Chairman Ben S. Bernanke said in testimony to Congress's Joint Economic Committee that the U.S. economy may ``contract slightly'' in the first half.
The IMF forecasts were on a slide presentation prepared by its Asia-Pacific department. Bill Murray, an IMF spokesman in Washington, declined to comment on the report. The lender is scheduled to publish its new forecasts on April 9.
The world's biggest financial companies have reported about $232 billion in credit losses and writedowns since the start of 2007, data compiled by Bloomberg show. UBS AG said yesterday it will have $19 billion more writedowns on assets related to mortgage assets, and Deutsche Bank AG reported $3.9 billion of further value reductions.
That's prompting banks to stop lending to all but the safest borrower, undermining consumer spending and business investment.
``The IMF's forecast is now below the world economy's longer- term trend so there is certainly some significance in what it is now seeing,'' said Andy Cates, a global economist at UBS in London. ``The world economy is slowing quite considerably and will be very different from what we've become accustomed to.''
U.S. European Growth
The IMF gave a 25 percent chance that global growth will drop to 3 percent or less in 2008 and 2009, a pace the fund described as equivalent to a world recession. The last time that happened was in 2001.
The fund lowered its forecast for U.S. economic growth to 0.5 percent this year, according to the document, below a 1.5 percent prediction made in January. The world's biggest economy will expand 0.6 percent in 2009, it said.
``It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,'' Bernanke said today. While the Fed expects the economy to return to its long-term growth pace in 2009, ``the uncertainty attending this forecast is quite high.''
The euro region will expand 1.3 percent in 2008, the document said, down from the fund's 1.6 percent projection in January.
``Growth in the U.S. and Europe is slowing sharply,'' the IMF document said. ``The ECB can now afford some easing of the policy stance.''
`Greatest Risk'
The ECB has left its benchmark rate at a six-year high of 4 percent as inflation runs at 3.5 percent, above its goal of 2 percent and almost the fastest pace in 16 years.
Stocks have dropped this year as investors increased bets on a U.S. recession, pushing the Standard & Poor's 500 Index down 7 percent this year.
``The greatest risk comes from the still-unfolding events in financial markets, particularly the potential that deep losses on structured credits related to the U.S. subprime mortgage market and other sectors would seriously impair financial-system capital and initiate a global de-leveraging that would turn the current credit squeeze into a full-blown credit crunch,'' the IMF statement said.
Some investors are speculating banks can weather further credit losses and the S&P 500 today extended yesterday's 3.6 percent gain, part of the U.S. market's best start to a second quarter in 70 years. The index climbed 0.5 percent to 1376.75 as at 11:03 a.m. in New York.
Asian Outlook
Japan's economy, the world's second largest, will grow 1.4 percent in 2008, less than the 1.5 percent the IMF predicted in January, according to the statement. China will grow 9.3 percent this year, slower than the 10 percent projection made in January, the statement said.
The Asian Development Bank today lowered its forecasts for Asia, and said central banks in the region will pursue policies to quell inflation rather than spur economic growth. The World Bank earlier this week also warned of the threat of rising energy and food prices. Growth in Asia excluding Japan will be 7.6 percent this year, the IMF said.
``The divergence between advanced and emerging economies is expected to continue, with growth in advanced economies generally expected to fall well below potential,'' the IMF document said.
Roger Nightingale, global strategist at Pointon York Ltd. in London, said the IMF had been slow in spotting the slowdown.
Too Late?
``The IMF only really forecasts these things after they've begun,'' he told Bloomberg Television. ``You've got America, Italy and several other European countries and one or two Asian countries, actually in or very close to recession, and yet the IMF just now begins to talk about this phenomenon.''
The IMF statement said world inflation will remain elevated in the first half of 2008.
The U.S. dollar is strong relative to fundamentals and China's yuan remains ``substantially undervalued,'' the document said.
``The main counterpart of the dollar's depreciation since August has been the appreciation of freely floating currencies, notably the Canadian dollar and the euro, with the latter now being on the strong side relative to fundamentals,'' the statement said.
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