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IMF warns of ‘severe global slowdown’

By Javier Blas and Scheherazade Daneshkhu in London

Published: September 6 2006 00:20 | Last updated: September 6 2006 00:20

The world is set to enjoy a fifth record year of high growth next year, says the International Monetary Fund, but it warns that the risks of a sharp slowdown have significantly increased.

The IMF will say next week that the world economy is on track to grow at 5.1 per cent this year but the risk of a severe global slowdown in 2007 is stronger than at any time since the 2001 terror attacks on the US.

“Risk to the global outlook is clearly tilted to the downside,” the IMF said, adding, “there is a one-in-six chance of growth falling below 3.25 per cent in 2007.”

The warning comes in a report to finance ministers at next week’s meeting of the G7 in Singapore.

The report, seen by Expansión, the Financial Times’ Spanish partner paper, is based on the IMF’s World Economic Outlook, due for publication next week.

The IMF warns slower growth could be triggered by a sharp US housing market slowdown or by surging inflationary expectations that forced central banks to raise interest rates.

The report’s central forecast points to global growth of 4.9 per cent next year, with G7 economies slowing from 2.9 per cent in 2006 to 2.5 per cent in 2007.

Although the IMF has been warning for several years of mounting risk for the global economy, it is the first time it has warned so strongly about such a sharp potential slowdown.

“There is considerable uncertainty about whether the global economy will achieve a soft landing to a more sustainable pace of expansion or whether the world faces a period of sharply slower growth,” the Fund report says.

“Tight commodities markets are contributing to inflation concerns and the risk of a growth slowdown,” it warns. For that reason, “further [monetary] tightening cannot be ruled out” in the US, while “in the euro area, some further tightening will likely be needed to maintain price stability in the medium run”.

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