IMF Predicts 'Moderate' US Slowdown

Source : The Business Times, September 12, 2007

LONDON - The US home loan crisis will cause just a modest slowdown of the American economy and have a limited impact on the rest of the world, the International Monetary Fund's chief economist said on Wednesday.

'We've seen a shock that has spread to other industrialised countries faster than expected,' said Simon Johnson. 'It's an important wake-up call for all of us.'

But, repeating an IMF analysis made earlier this month, he insisted that the economic fundamentals remained good and that the sub-prime loan crisis' 'effects on the real economy remain limited'. It will result in only 'a moderate slowdown in the US,' where poor economic data have fuelled fears of a recession, and 'will have a small effect on global growth'.

Rising US home foreclosures and a persistent housing slump have triggered a US credit crunch which has unsettled global markets and raised concerns about a possible US economic slowdown.

The credit crunch has spread across the world, with the European and other central banks pumping tens of billions of dollars into the money markets so that commercial banks can continue to extend the credit on which the global economy depends.

Mr Johnson said that 'the extent of European banks' exposure (to the US sub-prime crisis) was a surprise' but that the 'European economy remains strong'.

He said that 'we don't really understand why this (the sub-prime crisis) is continuing' but that 'central banks are ready to provide liquidity to the system and that keeps the banks comfortable in the short run'.

The IMF last week said it was scaling back its projections for economic growth in the United States and Europe following the turmoil on global stock markets tied to the US housing downturn.

It did not reveal how much it expected to trim its growth estimates, but said fresh assumptions would likely be released in mid-October ahead of the IMF and World Bank annual meetings. -- AFP