Recession time in the World
Posted at: 2008-04-28
The world is facing the biggest financial shock since the Great Depression, warns the International Monetary Fund.
Ant it warns that Britain could be the country hit the hardest by the global credit crunch as it has bigger debts than anywhere else.
In its most startling report of modern times, the IMF says the meltdown "has inflicted the heavy damage on markets and the financial institutions at the core of the financial system".
Analysis by the IMF reveals British banks will lose more than £20 billon from the international mortgage meltdown, equivalent to 3 percent of gross domestic product (GDP).
For the first time, the IMF predicts that the American economy is heading for recession and will shrink by 0.7 percent this year, sending shockwaves across the globe.
American banks, which it was thought would be worst affected, will lose £72 billion or 1.4 percent of US GDP. Despite healthy growth in the Far East, the IMF believes there is a 25 percent chance the whole world could follow the Americans into recession.
"The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression," the report says.
It estimates that the losses from American mortgages will reach $945 billion (£500 billion) more than twice the previous estimates. The US housing collapse is far from over, with IMF economists expecting a further 10 percent decline in 2008, on top of a similar fall in prices in the previous years.
Such declines, it believes are way beyond anything seen in the previous American experience.
Last night it emerged that the world's leading bankers had accepted much of the blame for the credit crisis. The Institute of International Finance, which represents more than 375 of the world's leading financial companies, said there had been "major points of weakness in business practices".
These include bankers' pay and risk management.
The apocalyptic language used by the IMF is highly unusual and reflects an unprecedented concern about the impact of the credit crunch which has prevented banks from borrowing in the wholesale money markets, making it al but impossible to fund new mortgage lending on both sides of the Atlantic. In Britain, the IMF warns that the "housing correction will continue to impact on consumers" and "be a drag on the economy".
The IMF's top economist, Charles Collyns, was skeptical about the chances of Alistair Darling meeting his growth forecast for Britain of 2 percent this year, as set out in the Budget last month.
Meanwhile, speculation about the half percent cut in UK interest rates caused the pound to fall to a record low against the euro, which was last night worth 80p.
He said the IMF's own forecast of 1.6 percent output expansion "was in line with the consensus".
Ahead of his arrival in Washington for his meeting with the world's top financial leaders, the Chancellor stood by his Budget forecasts.
He said there "are grounds for optimism" despite the unprecedented shock for the economy.
Britain, he claimed, "has a strong economy that has been remarkably resilient".
In contrast, the top IMF economist said: "The housing market will be a drag on the economy."
He also warned that Britain was extremely vulnerable to the cold winds blowing out of the US and Europe, with the German economy also slowing rapidly.
"In the UK, there are a number of factors both domestically and externally holding back the economy. We do see house prices softening and we see potential for that to continue, with an impact on consumption.
"We also see the UK affected by the tightening in financial constraints related to the turmoil in the financial market.
"It will also be affected by the slowdown in the US and the euro area," Collyns cautioned.
Britain, in the vie of the IMF, is much less well placed to deal with the downturn than our counterparts including the Americans because of the UK's soaring budget deficit which is expected to hit £38b this year.
He also noted that Britain's national debt, the accumulated sum of the nation's borrowing over past years, was perilously close to 40 percent of the national output - the self-imposed limit under Gordon Brown's fiscal rules.
"There has been an upward drift in the fiscal deficit in the UK," Collyns said.
Any hope that pressure on the US economy, the key to our own economic health, will improve in 2009 - when there is a new President in the White House - was brushed aside by the IMF.
"Downside risks especially for 2009 remain a concern," it cautioned. A house price collapse in the US beyond the 14 to 20 percent built into the IMF's forecasts, "could have serious repercussions".
It could affect other economies including those of Britain, France, Germany and Switzerland because of the exposure of high street banks to debts originating in the US. An end was insight for Britain's housing boom with "a sharp deceleration in house prices".
The IMF noted that in the past, house price falls, of the kind now emerging in the UK, have been a significant factor on the road to recession.