GLOBAL - The US economy is likely to dip into "mild recession" and there is now a one in four chance of a global recession in 2008 and 2009, according to a International Monetary Fund.

The body's latest world economic outlook report predicts global growth will slow to 3.7% in 2008, on the back of the credit crunch and its subsequent financial crisis - 0.5 percentage points lower than forecast in January - and there is now "a 25% chance the global economy will record 3% or less growth in 2008 and 2009, equivalent to a recession" said the IMF.

More specifically, the US is expected to slip into a "mild recession" in 2008, from which it will recover "only modestly", as IMF suggests its current US growth projections will be just 0.5% and 0.6% in 2008 respectively in 2008 and 2009, compared with world output of 3.7% in 2008 and 3.8% in 2009.

The eurozone is predicted to see growth of 1.4% in 2008 and 1.2% in 2009, compared with 2.6% last year, and is described as "sluggish" for the next two years as economies are likely to be hit largely as a result of "financial strains and trade spillovers" created by a combination of deteriorating financial market conditions and the ongoing correction in the US housing market.

Italy appears to be hardest hit as its growth is predicted to slow from 1.5% last year to just 0.3% in both '08 and '09 but Germany will also see a slowdown from 2.5% last year to 1.4% in 2008 and 1% in 2009, according to the IMF, while France will drop from 1.9% to 1.4% and 1.2% growth, Spain will fare better at 1.8% in 2008 and 1.7% in 2009, and the UK's potential growth has been halved from 3.1% in 2007 to 1.6% in the next two years. (See table at the end of the story for more information on European economies)

In contrast, the emerging and developing economies will hold relatively well, where they are not too reliant on short-term activity with the US, as Russia's economy is expected to grow by 6.8% in 2008 and 6.3% while China will still see growth of 9.3% and 9.5% respectively.

Simon Johnson, chief economist at the IMF, notes while the financial turmoil has played a major role in the economic shift since last summer, he is still concerned about the impact high commodity prices could yet have, as he noted:

"The effect of the financial turmoil in the United States has been to lower the prospects of growth but, somewhat paradoxically, it has also increased oil prices, metal prices, and of course food prices," creating "severe inflationary pressures for many countries and they make it harder for monetary and fiscal policy to manage this part of the global business cycle," said Johnson.

This latest report follows evidence presented yesterday by the IMF suggesting the total cost of the credit crunch is now approaching $1trn (€630bn), and it is possible "more such funding" from investors such as sovereign wealth funds (SWFs) is likely to be needed to help capitalise financial institutions, as been seen since November last year.

"Systematically important financial institutions need to move quickly to raise equity and medium-term funding, even if it is more costly to do so now, in order to boost confidence and avoid further undermining of credit channels," said the IMF survey.

It also warns "there are also signs that house prices in mature markets other than the US could fall".

IMF predicted economic growth
Country       Real GDP(%): 2007    2008    2009
US                                         2.2        0.5       0.6
Euro area                             2.6         1.4      1.2
Germany                              2.5          1.4      1.0
France                                  2.5         1.4       1.2
Italy                                      1.5          0.3       0.3
Spain                                    3.8          1.8       1.7
Netherlands                         3.5          2.1      1.6
Belgium                                2.7          1.4       1.2
Austria                                 3.4          1.9        1.7
Finland                                 4.4          2.4         2.1
Greece                                 4.0          3.5        3.3
Portugal                               1.9           1.3        1.4
Ireland                                  5.3          1.8         3.0
Luxembourg                        5.4           3.1         3.2
Slovenia                               6.1           4.1         3.5
Cyprus                                 4.4           3.4         3.5
Malta                                    3.8           2.2          2.0
UK                                        3.1           1.6          1.6