WASHINGTON – Global growth has slowed “markedly” amid the turmoil in financial markets, and risks remain to the downside, the International Monetary Fund said Tuesday.

In updating its World Economic Outlook, the fund said the world economy should slow to a 4.1 percent growth rate in 2008 from an estimated 4.9 percent in 2007, The Wall Street Journal reported.

That amounts to a 0.3 percentage point reduction in its growth estimate for this year from the World Economic Outlook released in October, taking into account a recent update in the model used to measure growth that resulted in about a half-point reduction in its forecasts from 2005 to 2008.

The U.S. economy is the main drag on the world economy, expected to decelerate to 1.5 percent growth in 2008 from an estimated 2.2 percent rate last year. The 2008 forecast is a reduction of 0.4 percentage point from the revised October estimate.

“Financial market strains originating through the U.S. subprime sector — and the associated financial losses — have deepened and spread,” said IMF chief economist Simon Johnson at a press conference to discuss the report.

The IMF included a potential stimulus package in its U.S. estimate. Johnson said it is difficult to predict the impact, but the $150 billion plan agreed to between the White House and leaders of the House of Representatives could add 0.2 to 0.3 percentage point to 2008 growth.

Any stimulus needs to be temporary, Johnson said, citing the “real risk” that the measures will raise the size of the budget deficit over the long term. The IMF cut its 2008 forecast for the euro area to 1.6 percent from an initial estimate of 2.1 percent, citing an overall deterioration in confidence. The region is estimated to have expanded at a 2.6 percent pace last year.

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Inflation remains a “serious concern” in Europe, said Johnson, so the European Central Bank’s steady monetary policy has been appropriate. But he said policy makers should remain flexible in response to slowing growth or rising inflation.

Japan’s forecast for this year was trimmed by 0.2 percentage point to 1.5 percent, on the back of an estimated 1.9 percent growth rate in 2007. Building standards have tightened, while sentiment has worsened among consumers and businesses, the IMF said in the report.

Emerging market economies have been “resilient,” the fund said, benefiting from domestic demand and more disciplined macroeconomic policies. Johnson said developing countries should remain focused on containing price pressures and maintaining macroeconomic stability.

China is expected to grow 10 percent in 2008, compared with11.4 percent last year. Latin American economies are expected to slow to 4.3 percent this year from 5.4 percent in 2007.

The balance of risks for global growth remain to the downside, Johnson said, with the biggest concern being that the troubled financial markets do more damage to domestic demand in advanced economies and spill over into emerging markets.

Other risks include rising inflation in both advanced and emerging economies, as well as continuing global imbalances, the report said.

“Monetary policy faces the difficult challenge of balancing the risks of higher inflation and slower economic activity, although a possible softening of oil prices could moderate inflation pressures,” it said.

Warning that a deeper downturn in the U.S. or elsewhere could cause a more broad deterioration in credit beyond the crisis in the U.S. subprime mortgage market, the fund said that policies are needed to address both near-term strains and long-term stability. The IMF is working with the Financial Stability Forum — an international group made up of central banks, regulators and finance ministers – to come up with an assessment the causes of the crisis.

Jaime Caruana, director of the capital markets division, said at the press conference that much of the adjustment in financial markets has already happened, but that “strains persist” and some emerging markets might not be able to avoid spillover effects.

He laid out several lessons that the IMF has learned and is developing for its next report in April.

“The immediate priority should be to rebuild counterparty confidence and the financial soundness of institutions,” said Caruana, adding that institutions need to focus on improving disclosure and maintaining adequate capital.

In its report, the IMF welcomed recent efforts by banks to raise capital and cut dividends.

Central banks will have to remain active in ensuring sufficient liquidity in money markets, said Caruana.

When asked about the fraudulent trading at Societe Generale and the decision by the Bank of France not to disclose the scandal right away, Caruana said the lesson he would draw is “the importance of improving risk management in financial institutions and transparency.”

In the report, the IMF suggests the possibility of additional coordinated action by central banks, saying they must “maintain flexibility in adapting to the needs of the market — initiating and utilizing joint initiatives” like the auctions conducted by the Federal Reserve, European Central Bank and Swiss National Bank last December.

Monetary policy makers should also work towards “a convergence of practices” in the tools they use to manage liquidity, the fund added, citing difficulty that central banks are having in communicating their actions and concerns. National and cross-border arrangements to share information and coordinate actions could also be strengthened, it said.

Among other actions that can be taken over the longer term, credit rating agencies could improve their methodologies and provide more information about the sensitivity of the ratings to the underlying assumptions. Unregulated financial institutions that originate mortgages and other consumer credits offered by regulated institutions should be subject to similar disclosure and consumer protection requirements, the IMF said.

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