European growth to slow next yr on credit crunch, says IMF

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Economic growth will probably slow across Europe next year because of the fallout from the slump in the US subprime mortgage market, the International Monetary Fund said.

The European Union's economy will probably expand an annual 3.2% in 2008, compared with 3.7% this year, the IMF said in a report. The pace of growth in emerging economies including Russia and Ukraine, while less affected, will also slow next year, it said. “Money and credit markets remain tight,'' the Washington- based IMF said in the Regional Economic Outlook for Europe, released on Monday. “Protracted credit market tightness constitutes a key downside risk to this outlook, especially for advanced economies.'' The collapse of the US subprime mortgage market has rippled through the world financial system, raising borrowing costs and prompting fears of a global economic slowdown. The recent financial market turbulence is “unprecedented'' because it originated in advanced economies and affected them more than emerging markets, the IMF said. Emerging economies, while less affected because of their”limited reliance on Interbank markets and complex financial products,'' may be hurt by the greater overall aversion to risk and slowing foreign demand.

Countries in “the Baltics and several economies in southeastern Europe,'' which have been running widening current- account deficits, may face the greatest “adjustment problems,'' the report said.Latvia's current-account deficit will probably widen to 27.3% of gross domestic product next year from 25.3% t of GDP in 2007, according to the IMF. Spain's current-account deficit will reach 10.2% of GDP, compared with this year's 9.8%, the report said.“

To reduce vulnerabilities and raise medium-term growth prospects, Europe needs to continue fiscal adjustment and pursue structural reforms proactively,'' the IMF said. Fiscal balances “ already deteriorated in 2006,'' in Serbia, Hungary, Romania and the Slovak Republic. Norway and Russia are unwinding large, oil-driven surpluses, according to the report.

In the euro area, fiscal consolidation has continued in 2007 and is projected to stop in most countries in 2008. France and Italy are planning tax cuts and postponing further consolidation, the IMF said.

“Europe stands to gain considerably from continuing economic integration,'' the IMF said, adding that some emerging economies need to reign in inflation to boost financial development. “Emerging economies outside the European Union should focus on reinforcing the foundations of financial development: low and stable inflation, good institutional quality, and the rule of law,'' the report said.

Belarus, Russia, Serbia and Turkey, on average, had ``double- digit'' inflation from 2003 through 2006. Inflation in Ukraine and Moldova may exceed 10% this year.