Mumbai: The International Monetary Fund (IMF) expects global growth to slow significantly in the second half of the year, before recovering gradually after 2009.
The IMF expects a moderation in global growth from 5 per cent in 2007 to 4.1 per cent in 2008 and 3.9 per cent in 2009.
Revised forecasts in the IMF's World Economic Outlook (WEO), released lat week, also raised inflation projections, particularly for emerging markets and developing countries.
Following a better-than-expected performance in the early part of 2008, WEO projections for the United States, the euro area, and Japan show a slowdown in activity in the second half of 2008.
Expansions in emerging and developing economies are also expected to lose further steam, with growth in these countries projected to ease to around 7 per cent in 2008-09 from 8 per cent in 2007. China's growth rate is expected to ease from near 12 per cent in 2007 to around 10 per cent in 2008-09.
''The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere, notably in emerging and developing economies," the WEO says.
At the same time, as the growth slowdown, rising energy and commodity prices have boosted inflationary pressure, particularly in emerging and developing economies. In advanced economies, inflation pressures are likely to be countered by slowing demand and, with commodity prices projected to stabilise, the expected increase in inflation for 2008 is forecast to be reversed in 2009.
In emerging and developing countries, inflationary pressures are mounting faster, fuelled by soaring commodity prices, above-trend growth, and accommodative macroeconomic policies. Hence, inflation forecasts for these economies have been raised by more than 1.5 percentage points in both 2008 and 2009, to 9.1 per cent and 7.4 per cent, respectively, and the moderation in inflation in 2009 will depend on more assertive tightening of monetary conditions, it said.
"In the recent past, the global economy has managed to take large shocks in stride, but we think its capacity to absorb them is being increasingly challenged," IMF Chief economist Simon Johnson said at a press briefing in Washington.
''Top priority for policymakers is to head off rising inflationary pressure while keeping sight of risks to growth. In many emerging economies, tighter monetary policy and greater fiscal restraint are required, combined in some cases with more flexible exchange rate management," says the report.
In the major advanced economies, the case for monetary tightening is seen as less compelling, given that inflation expectations and labor costs are projected to remain well anchored while growth is weakening, but inflation pressures need to be monitored, it added.
Purchasing power in commodity-importing economies has been eroded. Credit conditions in advanced economies are expected to remain tight in the coming quarters, with banks gradually repairing their balance sheets but facing additional losses from weakening credit performance in the context of slowing economies, it noted.
Risks to the global growth outlook are seen by the WEO as balanced. Demand in advanced and emerging economies might be more resilient than projected to recent commodity price and financial shocks, as was the case during the first quarter of 2008. However, financial markets remain fragile and inflation is a rising concern, it said.
The risk of second-round effects from the surge in commodity prices complicates policymakers' response to the slowdown, particularly in advanced economies, while in emerging economies stronger action is likely to be needed to cool activity and reverse rising inflation momentum.
Additional oil and food price shocks would exacerbate inflation concerns, while further weakening consumption in importing countries.