IMF Sees Prolonged US Slowdown

Source : The Business Times, July 30, 2008

It cites worsening credit conditions for consumers and banks

(WASHINGTON) The International Monetary Fund (IMF) said on Monday there's no end in sight to the US housing recession and warned that deteriorating credit conditions for consumers and banks may prolong a period of slow economic growth.

'At the moment, a bottom for the housing market is not visible,' the IMF said in its Global Financial Stability Report, released in Washington. 'Stemming the decline in the US housing market is necessary for market stabilisation as this would help both households and financial institutions to recover.'

The IMF, which a year ago failed to foresee the depth of the sub-prime mortgage collapse, stood by its April forecast for about US$1 trillion in losses stemming from the US mortgage crisis. While US policy makers have helped contain the financial losses, 'credit risks remain elevated' and banks need to raise more capital, the Washington-based lender said.

'The growing concern is that, with delinquencies and foreclosures in the US housing market rising sharply, and house prices continuing to fall, loan deterioration is becoming more widespread,' the IMF said.

Worldwide asset writedowns and losses have totalled US$469 billion in the past year, and US$345 billion has been raised.

The White House also on Monday lowered its forecast for economic growth this year and next and said unemployment is likely to rise as housing and financial debacles along with high energy prices take their toll.

Under the Bush administration's new forecasts, gross domestic product is estimated to grow by only 1.6 per cent this year. That's down from a 2.7 per cent growth projection made in February.

Growth next year is expected to clock in at 2.2 per cent, also lower than the 3 per cent growth rate previously estimated by the White House's budget office.

'The US economy has continued to expand, but growth has slowed as a result of the sharp housing decline, disruptions in financial markets and high energy prices,' the administration said.

Jaime Caruana, head of the IMF's capital market division, said housing data in the US showed few signs of improvement. 'Some indicators continue to go south,' he told the press in Washington on Monday. Improving affordability, he felt, should at some point help the market recover.

Falling share prices are making it harder for banks to raise capital, increasing the risk of a downward spiral in the global economy, the IMF said. The outlook for banks may make investors reluctant to provide fresh funds needed to restore the strength of financial institutions, the fund added.

In its most sweeping effort to halt the biggest housing slump since the Depression, the US Congress last week passed legislation to stem foreclosures for 400,000 homeowners and aid Fannie Mae and Freddie Mac, the two largest sources of US mortgage financing. President George W Bush may sign the bill into law this week.

The report said oversight of Fannie Mae and Freddie Mac was too weak.

'Part of the problem stems from the current regulatory framework, which has allowed their balance sheets to expand to their current systemic significance,' the IMF pointed out. -- Bloomberg, AP