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Thursday, October 2, 2008

US faces worse recession than euro zone, warns IMF

The United States could be heading for a significant recession as the financial crisis bites, but the euro area may suffer no worse than an economic slowdown, according to an authoritative new report.


The study from the International Monetary Fund also warned that a banking crisis tends to double or triple the severity of the economic downturn that follows. This underlines the scale of the slump facing the broader economy both in the UK and elsewhere.

It warned that: "The financial turmoil that began in the summer of 2007 has mutated into a full-blown crisis," adding that there is now "a substantial likelihood of a sharp downturn in the US."


The warning came in excerpts of the IMF's closely-watched World Economic Outlook. It may cause some controversy, since a number of euro zone countries are already facing recession, while the US was still expanding in the second quarter of the year.

It contrasts with its comparatively optimistic forecast for the US economy earlier this year, which said that the US would only shrink slightly before bouncing back next year.

However, the report's author, Charles Collyns, warned that it was unrealistic for a country to expect to endure a banking crisis and avoid a major economic jolt as a consequence.


"I cannot think of an example of a country that had a major banking system failure and did not suffer serious economic consequences as a result," he said.

"When the banking system suffers major damage, as in the current episode, the likelihood of a severe and protracted downturn in activity increases."

The report added that in the euro area: "The relatively strong position of households offers some protection against a sharp downturn, despite the appreciable run-up in asset prices and the credit ratio ahead of the current financial turmoil." - Edmund Conway, Economics Editor

1 comment:

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