IMF sees US falling into recession
WASHINGTON (AP) - April 9, 2008 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."
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