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US in 'modest recession,' IMF says

Latest update : 2008-04-10

The US economy is no doubt in a "modest recession," despite a 168-billion dollar package and sharp interest rate cuts aimed to temper the housing market crisis, and will only recover slowly in 2009, the IMF says.

The US economy is likely in a "modest recession" and will stagnate through much of 2009 as housing prices slide further and credit conditions remain difficult, the IMF said Wednesday.
The International Monetary Fund said in its World Economic Outlook that the world's biggest economy would see growth overall for 2008 of just 0.5 percent, even with a massive tax rebate program designed to boost consumer spending.
For 2009, improvement will be scant, with growth averaging a meager 0.6 precent.
The IMF said even with the 168-billion-dollar stimulus and aggressive cutting of interest rates by the Federal Reserve, the US economy is still being hammered by the housing market crisis and a related credit squeeze.
"There are clear signs that housing weakness is now feeding through into labor markets and consumption," the semiannual IMF report said.
"Rapidly weakening consumer and corporate sentiment suggest that downward pressure on domestic spending and incomes will intensify. The key question is how long the present downturn will last."
The report said US home prices tumbled as much as 10 percent in 2007 but added: "the market remains far from equilibrium, with inventories of unsold houses still close to record levels and home value indicators still elevated well above historical norms."
The IMF said its "baseline scenario" is for the correction in home prices to be in a range of 14 to 22 percent, "unprecedented for the United States, although not elsewhere."
The report said a recovery is likely to be hampered by troubles in the banking system, which has already absorbed massive losses but is unable to buy and sell mortgage-backed securities for many types of home loans.
"Bank lending conditions have already been tightened, certain types of financing -- such as asset-backed commercial paper and credits for leveraged buyouts -- have largely dried up," the report said.
The report said banks have also tightened other types of loans for credit cards and commercial real estate.
"All these effects threaten to have a significant restraining effect on activity, pushing up default rates and lowering underlying asset values, with further adverse impact on financial markets," the IMF said.
Because of these effects, the IMF lopped a full percentage point off its projection for US growth in 2008 and 1.2 percentage points from 2009, compared with its already-lowered outlook issued in January.
"Reflecting these considerations, the baseline projections envisage that the economy will tip into modest recession in 2008, followed by a gradual recovery starting in 2009 that will be somewhat slower than that following the 2001 recession as household and financial balance sheets are repaired," the IMF concluded.
"All major components of domestic demand will be sickly during 2008. Residential investment will continue to drop; consumption will decline in the face of adverse wealth effects, tight credit, and deteriorating labor market conditions, despite tax credits in the recently enacted fiscal stimulus package; and business investment will also turn down," it said.
"In 2009, consumption will remain sluggish, as households continue to raise their saving rate."
One of the few bright spots will be rising exports, helped by a weak dollar, the report said.
Even with the gloomy forecast, the IMF would not rule out a further deterioration.
"Risks around this lower baseline are still somewhat weighted to the downside, particularly for 2009," it said.
"Negative financial and housing feedbacks could push activity down below the baseline. Nevertheless, concerns have been partially alleviated by vigorous policy responses, particularly the provision of liquidity to financial markets."
It said the Fed, which has already slashed its base rate by three full points to 2.25 percent "may well need to continue easing interest rates for some time, depending on the emerging evidence on the extent of the downturn."

Date created : 2008-04-09