Oct. 17 (Bloomberg) -- The International Monetary Fund cut its forecast for global growth next year and warned that even its new prediction may be too optimistic given threats posed by the sell-off in credit markets.

The IMF lowered its projection for the global expansion next year to 4.8 percent in its semiannual World Economic Outlook, from an estimate of 5.2 percent in July. A weaker outlook for the U.S. was mostly to blame, as the fund reduced its forecast to 1.9 percent, from 2.8 percent.

``I would emphasize that there are serious risks ahead,'' Simon Johnson, the IMF's chief economist, said at a press conference in Washington. ``The smoke has not yet cleared'' from the financial-market turmoil, he said.

``Robust'' growth in China, India and Russia, which accounted for half the global expansion over the past year, will compensate for the American slowdown, the fund said in its report. The IMF's new prediction is still half a point faster than the average pace so far this decade.

In calculating their estimates, IMF economists assumed that the Federal Reserve will cut interest rates by another half point by the end of this year. The Fed lowered its benchmark rate for the first time since 2003 last month, to 4.75 percent.

``Risks to the outlook lie firmly on the downside, centering around concern that financial-market strains could continue and trigger a more pronounced global slowdown,'' the Washington-based fund said. ``The immediate task for policy makers is to restore more normal financial-market conditions.''

Recession Risk

Reduced access to credit and higher costs of some types of mortgages may ``extend the decline in residential investment'' in the U.S., with falling home prices posing a danger to household spending, the fund said. ``Risks of a recession have risen,'' though the Fed would likely cut rates if the economy were threatened with rising weakness.

Signs that the expansion will continue ``below trend would justify further interest-rate reductions, provided that inflation remains contained,'' the IMF said.

The fund also anticipated that the European Central Bank and Bank of England will leave borrowing costs unchanged this quarter.

Central banks have done a ``good job'' in injecting liquidity into money markets, though they need to ensure their objectives are clear, Johnson said.

Europe, like the U.S., has ``uncertain prospects for domestic demand,'' the IMF said, lowering its 2008 growth estimate for the euro-region to 2.1 percent, from 2.5 percent. The 13-nation area will probably grow 2.5 percent this year, the fund said.

Japan to Slow

In Japan, gross domestic product will increase just 1.7 percent, down from the 2 percent pace estimated in July and 2 percent this year. The fund said it was incorporating the drop in GDP in the second quarter of this year, driven by lower investment and weaker consumer spending.

``Despite four years of robust growth, deflation has yet to be decisively beaten'' in Japan, the world's second-biggest economy, the IMF said. There is no ``strong case for tightening'' by the Bank of Japan, Johnson said, and the IMF doesn't expect a rate increase ``anytime soon.''

In contrast to the largest developed nations, ``strong domestic demand growth in emerging market economies should continue to be a key driver of global growth,'' the IMF said.

The fund expects China to expand by 10 percent in 2008, half a percentage point less than the July prediction. The 11.5 percent pace this year made China for the first time the largest contribution to global growth, the IMF said.

India, Russia

Indian GDP will increase by 8.4 percent next year, unchanged from the July projection, after an 8.9 percent expansion in 2007. Russia, propelled by exports of oil, natural gas and other commodities, will grow 6.5 percent in 2008, compared with the previous 6.8 percent estimate and 7 percent this year.

In Latin America, tighter government budgets have helped ``anchor investor confidence,'' with the main challenge being how to handle an influx of foreign capital. Brazil, the region's biggest economy, will expand 4 percent in 2008, from the previous projection of 4.2 percent.

Demand from emerging markets will help drive up energy costs further next year, the fund said. Oil, measured by an average of the prices of the Brent, Dubai and West Texas Intermediate types of crude, will climb 9.5 percent next year to $75 a barrel, from $68.52 this year, the fund said.

`Very Tight'

``Global oil markets are very tight,'' the report said. ``Oil prices are likely to remain high in the absence of a further change in OPEC's quota policies or a major global slowdown.''

Metal prices will probably ``soften further from recent highs,'' while food prices ``should also moderate,'' the IMF said.

Commodity costs pose some risk for consumer prices, particularly as ``heightened geopolitical concerns could lead to further price spikes that could quickly translate into higher headline inflation,'' the report said.

``In the emerging market and developing countries, inflation risks are more immediate,'' the report said. The fund said that food prices were a particular concern for developing countries, where produce often represents 35 percent to 40 percent of a consumption basket and ``the credibility of monetary policy regimes is less well established.''

The report said that global credit-market conditions had deteriorated since July, with a ``drying up of high-yield corporate bond issues, a sharp contraction in asset-backed commercial paper.''

Emerging Markets

Strains had started to ease by last month, the fund said, adding that developing economies have been less harmed by this episode of turbulence than by previous bouts of turmoil in financial markets. ``Most emerging markets have reduced external vulnerabilities and strengthened their public balance sheets and policy frameworks,'' the fund said.

In foreign-exchange markets, the dollar ``remains overvalued relative to medium term-fundamentals,'' the IMF said, echoing remarks by Managing Director Rodrigo de Rato two days ago. So far, the U.S. currency's depreciation has been ``orderly,'' Johnson said today.

The report said that, though the Chinese yuan continued to appreciate against the dollar, China's current account surplus continues to increase, along with its currency reserves.

China's currency remains ``undervalued'' and the fund expects it to advance ``a considerable amount'' in coming years, Johnson said.

To contact the reporter on this story: Christopher Swann in Washington at cswann1@bloomberg.net

Last Updated: October 17, 2007 10:29 EDT