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U.S. Downturn Effects May Ease Worldwide

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By Anthony Faiola
Washington Post Staff Writer
Wednesday, January 30, 2008

The spillover effect of the U.S. housing crisis and economic downturn will slow the global economy this year, the International Monetary Fund said yesterday. But some observers insist such forecasts could be worse, noting that America's role in the global marketplace is not as dominant as it once was.

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The IMF cut its 2008 global growth forecast to 4.1 percent -- down from 4.9 percent in 2007 and 0.3 percent slower than it predicted last October -- largely based on the expectation that the United States economy will markedly slow while perhaps avoiding an actual recession. That prognosis also takes into account recent data suggesting that global growth waned significantly in the final quarter of 2007, as tight credit woes spread from the United States to Europe and beyond.

Analysts caution that a sharper drop in the U.S. economy -- something widely feared, as evidenced by the global route on stock markets from Paris to Tokyo last week -- could yet plunge the world economy below the 2.5 to 3 percent growth range that constitutes a global recession. And around the world, billions of dollars in losses from America's subprime mortgage morass are still being accounted for, with experts predicting it will take a deeper financial toll in various countries by the time the dust clears.

The fund is forecasting that the economic woes will slow U.S. growth in 2008 to 1.5 percent, down from its earlier estimate of 1.9 percent. But, assuming it is right, economists note that the world economy may get by better than it once would have.

Five to 10 years ago, they said, that level of downturn in the United States would have hit the global economy harder. But with China's rise, surging oil wealth in the Gulf States and a generally healthy Europe, America's economic role in the world has become somewhat diluted. The United States unquestionably remains the No. 1 economy -- but those below it are mattering more and more.

Economists note, for example, that only five years ago, 33 percent of all Chinese exports went to the United States, a number that has fast reduced to the upper 20 percent range as China has cultivated markets in Asia, Europe and beyond.

C. Fred Bergsten, director of the Peterson Institute for International Economics, said that the shift has been so strong that the U.S. economy may actually be aided by "reverse coupling" -- a notion that the stronger global marketplace may buoy the bleaker economic outlook at home. He notes that that for many U.S. companies -- including Caterpillar, General Electric and IBM -- global export markets have become more important engines of growth than the once-all important domestic market.

Europe, in particular, is going to great pains to ensure that distinctions are drawn between it and the United States. Leaders of Europe's largest economies said yesterday in London that the zone's "fundamentals" remained "sound." They also called for increased regulations on banks and rating agencies to weed out the kind of subprime mortgage risk battering the United States and spreading increasingly overseas.

"The global economy has changed," Bergsten said. "Emerging markets are growing and crucial, accounting for about half of the world economy. And after coming off a record surge over the past four years, I would have to say that slowing growth to about 4 percent is still a pretty soft landing."

That said, downsides persist and others say it is wrong to overestimate the level of so-called decoupling in the global economy.

The IMF's updated Global Financial Stability Report released yesterday, for instance, warned that credit pressures have "reached a new phase -- a phase where credit concerns now extend beyond the subprime sector." It went on to highlight the risk that financial volatility and cuts in consumer spending in the developing world may yet spread to emerging markets.

"No one is going to be exempt from some slowdown," IMF Chief Economist Simon Johnson said at a briefing in Washington yesterday.

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