The International Monetary Fund projects a global recession can still be averted if financial markets stabilize and U.S. housing markets bottom out in 2009.
The financial crisis that began in U.S. housing markets has the world teetering on "the cusp of a global recession," according to a top IMF official.
But IMF Managing Director Dominique Strauss-Kahn said today that if countries act together, a slow economic recovery should begin in the second half of 2009.
Strauss-Kahn said the need for recapitalization was "well understood on both sides of the Atlantic" but cooperation was less evident. He urged European countries to work together to draw up national plans that provide liquidity from central banks, contain guarantees to depositors and assurances to creditors, and that recapitalize financial institutions.
In their latest World Economic Outlook, IMF economists this week called prospects for the global economy "exceptionally uncertain," with a growing chance of recession in many countries.
Global economic growth is expected to slow from 5 percent in 2007 to 3.9 percent in 2008 and 3 percent in 2009, the slowest pace since 2002.
The IMF projects that the economies of advanced nations will be "in or close to recession in the second half of 2008 and early 2009, and the anticipated recovery later in 2009 will be exceptionally gradual by past standards."
The U.S. housing sector is expected to finally reach bottom in 2009, "ending the intense drag on growth that has been present since 2006," the IMF projected.
Another key assumption behind the IMF’s projections for a recovery in 2009 is that drastic measures undertaken by the U.S. and European governments — including a plan to allow the U.S. Treasury Department to borrow up to $700 billion to buy up toxic assets from banks — succeed in stabilizing financial market conditions.
"Even with successful implementation of the plan to remove troubled assets from U.S. bank balance sheets, it will take time to rebuild confidence in asset valuations and alleviate counterparty concerns," the IMF said. "Moreover, banks are going to remain under pressure from the need for more capital combined with growing credit losses coming from the broader economy."
In the U.S., more than 10 million households owe more on their mortgages than their homes are worth, the IMF report said, thanks to home-price declines of 5 to 17 percent in the past year.
The IMF’s baseline projections anticipate that the U.S. housing cycle will eventually find a floor in 2009, after four years of correction. The projections assume another 10 percent decline in house prices by the end of the year, which will bring prices closer in line with fundamentals.
With residential investment near a 40-year low, the drop in housing starts is bringing down inventories of unsold new homes, the report said. Recent legislation to facilitate the refinancing of “underwater” mortgages with FHA-backed loans and the continued presence of Fannie Mae and Freddie Mac in the mortgage market will also help the bottom arrive next year, the report predicted. Fannie and Freddie have been supporting about 80 percent of new mortgage lending in recent quarters, the IMF said.
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