The International Monetary Fund yesterday put the chances of a global recession in 2008 at below 10 per cent, but cut its baseline prediction for growth from 5.2 per cent to 4.8 per cent, and hedged a relatively optimistic outlook for the world economy with caveats and cautions.
In particular, the fund's keenly-awaited World Economic Outlook warned that much of that still respectable growth rate would not come from the West. This year, China and India will be responsible for close to half of the growth in the global economy, outstripping contributions from the US and other developed economies for the first time.
While China is still expected to grow by 10 per cent next year, hardly affected by recent financial crises, most Western economies have seen reductions in growth forecasts.
The UK is expected to grow by 2.3 per cent in 2008; while that's been cut from a forecast of 2.7 per cent in July it remains more favourable than the expected figures in Germany and France (both 2 per cent) and Italy (1.3 per cent). For the euro area as a whole, growth of 2.1 per cent is predicted. Japan, on 1.7 per cent, is also due to disappoint.
The IMF's economic counsellor, Simon Johnson, said: "The main story continues to revolve around the weak housing market – spillovers to other sectors appear largely contained and a further period of growth below potential is the most likely scenario."
Thus growth of a mere 1.9 per cent is forecast for the US, almost a full percentage point lower than earlier thought and than what was achieved in 2006 – a considerable drop. As if on cue, economic data from the US, published yesterday, brought more gloom; new housing starts collapsed by 10.2 per cent in September, while inflation rose at 0.3 per cent last month after declining in August. The September rise in overall CPI was slightly ahead of Wall Street economists' forecast for a 0.2 per cent rise.
The IMF said it regarded the weakening position of the dollar as a "healthy" development, and judged that it was still "overvalued". In one scenario for the US modelled by the IMF, of a "sustained financial disturbance" with a 10 per cent drop in share and house prices, the growth forecast could be pushed down by as much as another 2 percentage points, putting the US in recession territory.
Even the subdued growth foreseen by the IMF is threatened by "the distinct possibility that recent turbulent conditions could continue for some time and generate a deeper 'credit crunch', with considerably greater macroeconomic impact". But, Mr Johnson congratulated the world's central bankers on doing a "very good job" so far.
Overvalued UK housing vulnerable to correction
Never mind what the estate agent may tell you, the International Monetary Fund thinks your home is overvalued. Noting that property prices in the US have risen by almost a third more than economic fundamentals – such as income growth and demographics – would imply, the fund said yesterday that overvaluations were "still larger in a number of other countries, including Ireland, the Netherlands and the United Kingdom".
The IMF warned: "The estimates suggest that a number of advanced economies' housing markets outside the United States could be vulnerable to a correction." It said "there would clearly be a sizeable impact on housing markets in the event of a widespread credit crunch".
However, IMF analysis also offered some comfort. Europe has generally avoided "sub- prime" lending, it said, and some "idiosyncratic factors such as constriction of supply and migration" might also underpin property values.