IMF Cuts World Growth Forecast

Bloomberg tells us that the IMF has lowered its global growth outlook due to the severity of the financial crisis, yet for those of us living in advanced economies, the discounted level of 3.7% still sounds pretty robust. I did go to the IMF website to see how the forecasts changed for the first versus the third world, but found no link (the latest news releases is April 1). I assume that will be remedied shortly.

From Bloomberg:

The International Monetary Fund cut its forecast for global growth this year, citing the worst financial crisis in the U.S. since the 1930s Great Depression.

The world economy will expand 3.7 percent in 2008, according to a document titled “IMF Background Paper on the Update of the Global and Regional Outlook” obtained by Bloomberg News at a meeting of Southeast Asian deputy finance ministers and central bank officials in Da Nang, Vietnam. In January the fund projected world growth of 4.1 percent.

“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,” it said.

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 global recession.

“The greatest risk comes from the still unfolding events in financial markets, particularly the potential that big losses related to the U.S. subprime mortgage market and others 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 statement said.

The IMF 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.

The euro region will expand 1.3 percent in 2008, the document said, down from the fund’s 1.6 percent projection in January.

Although this is largely anecdotal, a story in today’s New York Times on the 45% fall in the Shanghai stock market illustrates how precarious prosperity can be in emerging economies, Keep in mind that the fall was induced primarily by increases in interest rates, rather than a marked slowing of the economy. Nevertheless, short-sighted banking policy virtually guaranteed a stock market bubble, since deposits pay interest at a rate of 1% when inflation is 7-8%. Savers thus need to put their holdings at risk to avoid losing out in real terms.

From the New York Times:

A year ago, investors like Guan Ling were ebullient. Chinese share prices had climbed over 500 percent in the span of two years, setting off a nationwide stock buying frenzy….

That was last year. The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.

Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.

“These days my family quarrels a lot,” says Zhang Liying, 55, a retired hotel waitress who with her husband invested all their savings in the stock market. “My husband asked me to sell; I wanted to hold for a while. Now my husband condemns me as so stupid that we lost our family’s savings.”

Si Dansu, 68, and a retired engineer, is even more distraught, but she blames the government.

“I devoted my whole life to the country. I went to the countryside after graduation, and worked as an engineer in a Shanghai factory until retirement. I invested almost all my savings and retirement fund in the market 10 years ago. But now I’m totally penniless. All my stocks went down.”

Other parts of Asia are as bad, or worse. In India, stock prices have plunged 31 percent in Mumbai; they are off 31 percent in Japan and a whopping 53 percent in Vietnam, another booming economy. Angry investors have burned a securities regulator in effigy in Mumbai, and some are in tears in Ho Chi Minh City, Vietnam.

“Some of them have cried,” says Nguyen Quang Tri, 74, a retired cement company manager who was visiting a Ho Chi Minh City brokerage house this week. “I have my own equity, but most of the people here borrowed money from the bank.”….

Few experts say the stock plunge is a major threat to growth in the real economy here. But there are worries that a prolonged downturn could reverberate through China’s financial markets — especially since a large number of corporations had aggressively shifted money, sometimes secretly, to play the market.

By some estimates, 15 to 20 percent of the profits reported last year by publicly listed companies in Shanghai that are not involved in banking or finance (which usually invest in stocks) came from stock trading gains.

Companies with primary businesses like selling electricity, or even sports jackets, were moonlighting by trading stocks, hoping to bolster their earnings….

But the big companies were following the small investor. JPMorgan estimates that 150 million people in China were invested in the Chinese stock market as of the end of last year. That may still be a small slice of China’s 1.3 billion people, but it is a huge new constituency, and it has led to the birth of both a new source of potential popular discontent and a new lifestyle: the diehard investor…

Shopkeepers, real estate brokers, even maids and watermelon hawkers are said to have become day traders.

A new version of the national anthem made its way around the country last year, beginning, “Arise! Ye who haven’t opened an account! Pour your gold and silver into the hot market!”

The anthem went on: “The Chinese nation faces its craziest time. The passionate roar of our peoples will be heard!”…

In some brokerage houses, entire floors are divided into small and midsize rooms that investors camp out in, from opening to closing bell, with their lunch bags, knitting gear, playing cards and newspapers to help them feel at home.

Only now, many investors cannot bear to look at their screens.

“I’m getting out of the game,” said Yuan Yuan, 23, a researcher at a fund company in Shenzhen who also invests on his own. “The game is over. Big institutions pulled out first, only leaving the small investors.”

In China, the government fears that angry investors can be a social problem. And so while the state-run media report on the ups and downs of the market, and even warn investors of the risks and pitfalls of investing, the press does not usually report on investors’ anger….

“It’s a deformed market, an unhealthy market,” Mr. Guan says. “We’ve always had long bear markets and short bull markets.”

“Look,” he said, “it took two years to go from 1,000 to 6,000 but two months to go from 6,000 to 3,500.”

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