IMF: Deep recession likely in US, less so in eurozone

Source YahooAFP

WASHINGTON (AFP) - The United States could face a deep, prolonged recession from the current financial turmoil, with the eurozone less at risk, the International Monetary Fund said in a report Thursday.

With the global economy reeling from a credit crisis, IMF researchers found that banking sector strains were a strong marker of a significant downturn.

"Episodes of financial turmoil characterized by banking sector distress are more likely to be associated with severe and protracted downturns than episodes of stress centered mainly in securities or foreign exchange markets," the IMF said.

"Based on a comparison of the current episode of financial stress with previous episodes, there remains a substantial likelihood of a sharp downturn in the United States," it said.

The findings, reported in chapters released a week in advance of the full World Economic Outlook, appeared to signal the IMF will be significantly lowering its economic growth forecasts in the semiannual report.

In July, the IMF revised modestly upward growth forecasts of the April WEO but its chief economist, Simon Johnson, said there was still "a chance of a global recession," which many economists define by global growth below 3.0 percent.

The 185-nation institution said it studied the factors in financial turbulence that cause a sharp, prolonged contraction instead of a limited impact on the overall economy.

Analyzing data in 17 advanced economies over the past 30 years, the IMF said that about 60 percent of the 113 episodes of financial stress identified were followed by downturns that were banking-related.

And those downturns tended to be prolonged and more severe.

"The US economic downturn may well become more severe and could evolve into a recession," said the IMF.

The evidence for the euro area meanwhile "is more consistent with the pattern for a slowdown than a recession, and the dynamics also appear to be evolving with some lag," it said.

This difference was mainly due to the "relatively strong" household balance sheets in the 15-nation eurozone, where personal savings outpace those of Americans.

"The size of financial imbalances in the household sector is crucial in determining whether the downturn will turn into a recession," it said.

The IMF called on policymakers to take "strong actions" to deal with financial market stress, adding that support for the restoration of financial system capital seemed "particularly important."

However, it warned that policymakers "must seek to avoid longer-term moral hazard implications of any strategy to restore financial stability."

The advice came as the United States struggles to mount a 700-billion-dollar bailout of financial firms, touted by President George W. Bush's administration and Congressional leaders as key to averting a broader collapse of the world's largest economy.

In the July IMF forecasts, global expansion was seen at 4.1 percent this year and 3.9 percent in 2009, with the US at 1.3 percent, followed by 0.8 percent. Eurozone growth was seen at 1.7 percent and 1.2 percent.