IMF sees US falling into recession

April 9, 2008 12:04:00 PM PDT
The United States is headed for a recession, dragging world economic growth down along with it, the International Monetary Fund concluded in a sobering new forecast Wednesday that underscored the damage inflicted from the housing and credit debacles. The IMF's World Economic Outlook served as a reminder of just how swiftly economic and financial fortunes in the United States and beyond can unravel, affecting people, investors and businesses around the globe. The fund slashed growth projections for the United States - the epicenter of the woes - and for the world economy. The fragile state of affairs greatly raises the odds that the global economy could fall into a slump, the IMF said.

Financial problems that erupted in August 2007 "spread quickly and unpredictably" and caused "extensive damage," the IMF said. It described the financial shock as the biggest "since the Great Depression."

Economic growth in the United States is expected to slow to a crawl of just 0.5 percent this year, which would mark the worst pace in 17 years, when the country last suffered through a recession, the global finance body said. The United States won't fare much better next year; the IMF projected the U.S. economy will grow by a feeble 0.6 percent in 2009, when measured by an annual average.

"The U.S. economy will tip into a mild recession in 2008 as the result of mutually reinforcing cycles in the housing and financial markets," the IMF said.

Many private economists and members of the U.S. public believe the country has already fallen into its first recession since 2001. For the first time, Federal Reserve Chairman Ben Bernanke acknowledged last week that a recession was possible.

An increasing number of analysts think the U.S. economy, which grew by 2.2 percent in 2007, started shrinking in the first three months of this year and is still contracting. Under one rough rule, if the economy contracts for six straight months it is considered to be in a recession. A panel of experts at the National Bureau of Economic Research that determines when U.S. recessions begin and end, however, uses a broader definition, taking into account income, employment and other barometers.

When the IMF projected U.S. economic growth using another measure - comparing activity in the fourth quarter of one year with the previous year - the country's economy would actually shrink 0.7 percent this year, said the IMF's chief economist Simon Johnson. By that measure, the economy would grow by a still lackluster 1.6 percent in 2009, he added.

David McCormick, the Treasury Department's point person on international affairs, called the IMF's projections "unduly pessimistic."

Given the problems of the United States - the world's largest economy- the performance of the global economy also will be strained.

The IMF now expects the world economy, which grew by a robust 4.9 percent last year, to slow sharply. The fund is projecting the global economy to grow by 3.7 percent this year and 3.8 percent next year.

There's a risk that things could turn worse, it cautioned.

"The IMF now sees a 25 percent chance that global growth will drop to 3 percent or less in 2008 and 2009 - equivalent to a global recession," the fund said. "The greatest risk comes from the still-unfolding events in financial markets, particularly the potential for deep losses" on complex investments linked to the U.S. subprime mortgage market, the IMF said.

The sober IMF forecast comes days before the United States and other top economic powers are slated to meet Friday to discuss the problems and ways to deal with them. Talks will carry over into the weekend meetings of the IMF and the World Bank.

McCormick said finance officials on Friday will consider a plan, put forward by Bank of Italy Governor Mario Draghi, head of the Financial Stability Forum, to head off future financial crises.

The plan would focus on ways to bolster risk management practices, improve transparency and the accounting of complex investments and strengthen supervision. It also would take a closer look at credit-rating agencies, which have been criticized for not sufficiently assigning risk to certain mortgage-backed investments that eventually swooned in value.

"These efforts are a critical example of cooperation" among the Group of Seven countries, McCormick said. That group is made up of the United States, Japan, Germany, France, Britain, Italy and Canada. He was hopeful the plan would be rapidly implemented.

To limit the damage in the United States, the Federal Reserve has been slashing interest rates since last September and has taken a number of extraordinary measures to avert a financial meltdown, which would have dire consequences for the U.S. economy. The government, meanwhile, has enacted a $168 billion stimulus package of tax rebates for people and tax breaks for businesses.

Although the IMF said all these moves were appropriate, Johnson, nonetheless, predicted "significant strains in housing and credit markets are likely to be protracted."

House prices in the United States will continue to drop, with declines this year in the range of 14 to 20 percent, Johnson said. "The housing correction will continue for some time," he added.

Problems started in the United States with risky "subprime" mortgages made to people with blemished credit and quickly spread into other areas, hitting more creditworthy borrowers. Foreclosures in the U.S. hit record highs and financial companies racked up multibillion-dollar losses as mortgage-backed investments soured with the collapse of the U.S. housing market.

The fallout gripped investors on Wall Street and in other countries, creating a panicky atmosphere that threatened to paralyze financial markets in the United States and beyond. "The financial market crisis that erupted in August 2007," the IMF declared, "has developed into the largest financial shock since the Great Depression."

---

On the Net:

IMF: http://www.imf.org

Load Comments