IMF says U.S. on way to recession

ASSOCIATED PRESS

The United States is headed for a recession, dragging world economic growth down along with it, the International Monetary Fund concluded in a sobering forecast yesterday that underscored the damage inflicted by 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 0.5 percent this year, which would mark the worst pace in 17 years, when the country had suffered through a recession.

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.

David H. McCormick, the Treasury Department’s point person on international affairs, called the IMF’s projections “unduly pessimistic.”

Many private economists think the country already has fallen into its first recession since 2001. For the first time, Federal Reserve Chairman Ben S. Bernanke acknowledged last week that a recession is 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.

Mr. McCormick resisted using the word “recession” to describe the U.S. economy. “I don’t think it matters what you call it right now. … It’s clear the U.S. is suffering through a significant downturn in its growth,” he said.

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.

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

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

There’s a risk 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 as the United States and other top economic powers prepare to meet tomorrow 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.

Mr. McCormick said finance officials 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, Mr. McCormick said. That group consists of the United States, Japan, Germany, France, Britain, Italy and Canada.