IMF: as credit turmoil grows, US heads for recession


The US economy will tip into recession this year and there is a 25% chance world growth will drop to 3% or less - a level that would be considered recessionary, IMF said.

The International Monetary Fund said on Wednesday the global expansion of the last several years was fast losing ground in the face of a major financial crisis brought on by a downturn in the US housing sector that continues “full blast.”

While the IMF's latest World Economic Outlook puts world growth at 3.7% this year, the projection marked the second time in four months the global watchdog cut its forecast.

In October, it had looked for growth of 4.8 %, a forecast it had lowered to 4.1% in January to try to account for the world's fast-spreading credit woes.

The IMF sees only a bit of a pick-up next year, with growth reaching 3.8%, somewhat slower than that following the 2001 US recession.

In the United States, growth in economic output will skid from a subpar 2.2 % in 2007 to a bare-bones 0.5% this year and 0.6% in 2009, the fund said.

“The US economy will tip into mild recession in 2008 as the result of mutually reinforcing housing and financial market cycles, with only a gradual recovery in 2009,” it said.

The brunt of the crisis will be felt in the United States and Western Europe, the IMF said.

It cut its growth outlook for the euro zone to 1.4% this year, down from a January forecast of 1.6 percent and off sharply from last year's 2.6% expansion. In October, it had said it expected the euro zone to expand 2.1%.

For 2009, it expects euro-zone growth of just 1.2%.

The IMF cautioned that financial market strains would persist until there was greater clarity about the extent and distribution of losses on structured securities, and until banks rebuilt capital and strengthened their balance sheets.

The housing correction in the United States will remain a drag on demand and a source of uncertainty for financial markets, the fund said.

In contrast, emerging and developing economies have so far been less affected by the financial market turbulence and their growth is set to remain above trend, led by China and India.

The IMF said, however, there were signs economic activity was starting to moderate in some emerging and developing countries.

It cautioned that these countries would not always remain insulated, especially if the US-led downturn intensified, and said policy-makers should stand ready to respond.

Meanwhile, rising inflation in the developing world from higher food and energy prices, and overheating pressures as economic growth outstripped potential, were the biggest immediate challenges for policy-makers, the IMF said.

In Asia, robust inter-regional trade has helped to insulate the region from the slowdown in the West, although a sharper downturn could pose problems for export-dependent nations, the IMF said.

It said Japan and the emerging economies of Asia have limited direct exposure to US subprime securities but would suffer spillover in the export sector if demand weakened.

The economic expansion in regional growth locomotive China is projected to moderate to 9.3% this year from 11.4% in 2007, while growth in India is expected to slow to 7.9% from 9.2% last year.

In Sub-Sahara Africa, economic growth is set to ease by a fraction to 6.6% this year from 6.8% in 2007, as it largely looks set to avoid spillover from the global credit crisis.

Growth in the region would be led by oil exporters, such as Nigeria and Angola, reflecting new production facilities coming on stream, the IMF said. (Reuters)

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