American housing slump will likely deepen, affecting other countries

10th February 2009, Comments 0 comments

The IMF said that house prices in the US and other countries could continue to plunge through 2010, as unemployment rises amid the global economic slowdown.

Washington -- The International Monetary Fund warned last week that the US housing downturn may deepen and last longer than previously forecast, and the slump could spread to other countries.

In a report to the Group of 20 developed and developing countries, the IMF said that house prices in the US and other countries could continue to plunge through 2010 as unemployment rises amid the global economic slowdown.

"In the United States in particular, there is a risk of deeper and more prolonged housing correction," the Washington-based multilateral institution said.

The American housing slump, at the epicenter of the global financial crisis, is under severe pressure "as labor markets deteriorate further, mortgage financing remains restrained and foreclosures rise steeply as the ‘negative equity' problem in housing spreads," the IMF said. "There are risks that house price declines could intensify in other advanced economies and also spread to a broader range of countries, particularly if the availability of housing finance is squeezed through adjustment in the financial sector."

The report was prepared for a G20 ministerial meeting held in London on Jan. 31 and Feb. 1, ahead of a G20 summit in the British capital on April 2.

"House prices could continue to fall sharply through 2010, undermining recovery in financial markets and contributing to the adverse feedback loop with the real economy," the 185-nation IMF added.

Among the measures needed to confront the crisis, the IMF once again voiced support for fiscal stimulus plans to jump-start growth.

The IMF said that such projects, some still in the planning stage, could have "a considerable impact on G20 growth in 2009 -- on the order of 0.5 to 1.25 percentage points."

However, the IMF admitted the costs of the rescue packages would be high.

"To date, the G20 countries have adopted -- or plan to adopt -- fiscal stimulus measures amounting on average to around 0.5 percent of GDP in 2008, 1.5 percent of GDP in 2009, and about 1.25 percent of GDP in 2010,” it said. "In 2010, under current information regarding the size of fiscal packages, the growth effect would be minimal, but would obviously increase should countries adopt additional measures."

The IMF noted that its current 2010 estimate was tentative because most G20 countries had not yet announced fiscal packages for that year.

Among the advanced economies, the fiscal stimulus plans were expected to have the largest growth impact in Canada, Germany, Japan, South Korea and the United States, the IMF said. Among emerging countries, China, Russia, and South Africa would benefit most.

G20 leaders are to meet in London on April 2 to discuss progress made from their first summit in Washington in November, when they pledged to cooperate to battle the financial maelstrom.

Two weeks ago, the International Monetary Fund slashed its global economic outlook, predicting the financial crisis would slam growth to a virtual standstill this year as the world economy faces a "deep recession."

The advanced economies are expected to contract by 2.0 percent, their first annual contraction in the postwar period and far more than the negative 0.3 percent the IMF estimated less than three months ago.

According to the IMF, global banking industry losses may reach 2.2 trillion dollar losses in the current financial crisis.


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