The global economy is facing a major crisis, and the epicenter of the turmoil is the United States. The International Monetary Fund (IMF) has indicated in a recent report that the entire world economy may be dragged into a slump by the ongoing crises in the U.S. housing and credit markets.

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	The world economy, which grew by 4.9 % last year, is likely to experience a sharp decline in growth this year.

The world economy, which grew by 4.9 % last year, is likely to experience a sharp decline in growth this year. According to the IMF’s recently released World Economic Outlook report, the global economy will grow by 3.7% this year and will stay at around the same level the following year.

Meanwhile, a large number of economists believe that the U.S. is already in recession. The U.S. economy, which grew by 2.2% in 2007, is thought by many to have actually contracted in the first three months of this year. The IMF report says that growth in the U.S. economy overall this year could be as low as 0.5 % and that due to the ongoing financial problems the country’s performance will be strained even in 2009 and may register a feeble growth of just 0.6%.

In contrast, emerging and developing economies have so far been successful in weathering the financial turmoil in developed nations. That said, even the developing economies have recently begun to see some slowing in growth.

The U.S. Economic Environment

The bursting of the housing bubble that began to be evident in August of 2007 has inflicted severe damage to core financial systems in the U.S. The fallout has impaired liquidity despite aggressive measures by major central banks. The deepening economic weakness has also had led to reduced confidence in the liquidity of and returns on U.S. bonds and equities. As a result, the real effective exchange rate for the U.S. dollar has fallen sharply since mid-2007.

Growth Outlook for the U.S. Economy

Some economists are of the view that exports may prop up the U.S. economy. However, the International Monetary Fund’s projections don’t seem to agree.

Deteriorating financial market conditions and the continuing correction in the housing market may not allow the economy to recover from the slump in the near future. Other factors which are likely to affect the growth of the U.S. economy are weak market confidence, sluggish growth in disposable incomes, low consumption, higher energy costs, and constraints on household borrowing.

Though a fiscal stimulus package and the deep rate cuts imposed by the Federal Reserve are justified for an economy that is under stress, they may not be able to put the economy on a firm footing anytime soon.

Policymakers need to take strong steps to deal with financial market turmoil. The main goals that they should seek to accomplish are helping financial institutions to regain trust in their financial soundness and an easing of the liquidity strain.

Conclusion

To a large extent, the U.S. economy’s path over the next year or so will depend on how the present financial troubles evolve from this point onward. The challenge for policymakers is to address both inflationary pressures and recession fears with the utmost urgency.

On the net:

IMF Report: Global Growth Slows to 3.7 Percent

World Economic Outlook

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