IMF warns of US recession

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The International Monetary Fund has warned that the United States will tip into a "mild recession" later this year, with only a "gradual recovery" in 2009.

The organisation also said that there was a 25 per cent chance that global growth would also slump to below three per cent, which would be considered the equivalent of a world recession.

The IMF said global expansion over the last several years had rapidly dwindled due to financial turmoil created by the ongoing subprime mortgage crisis in the US.

On Tuesday, the IMF also estimated that the crisis could spawn total losses of $945 billion.

"The US economy will tip into mild recession in 2008 as the result of mutually reinforcing housing and financial market cycles, with only a gradual recovery in 2009," the organisation said.

The US economy has been brought to the brink of recession by the subprime crisis, in which lenders offered loans to higher-risk borrowers who were unable to pay their mortgages when interest rates went up.

Mixed global growth

The US is set to grow a paltry 0.5 per cent in 2008, the IMF said, despite the much vaunted billion-dollar government stimulus package launched earlier this year.

In 2009 US growth will improve to a mere 0.6 per cent, a "modest" recovery, as financial institutions recover from recent losses, with a "reasonable expectation" that US growth would move back to be above potential by 2010.

However in the short term, the risks to global growth remain "tilted to the downside," the IMF said in its report.

For the eurozone, the IMF cut its growth outlook to 1.4 per cent this year, down from a January forecast of 1.6 per cent and a sharp fall from last year's 2.6 per cent expansion.

For 2009, it expects eurozone growth of just 1.2 per cent.

China, meanwhile, is expected to continue to expand at a rate of 9.3 per cent in 2008 and 9.5 per cent in 2009.

Emerging and developing countries remain more resilient to the financial crisis because they are increasingly integrated into the global economy and a commodity price boom, with a slower but still robust combined growth of 6.7 per cent, the IMF said.

The IMF also said that recent steep interest rate cuts by the US central bank, the Federal Reserve, were justified while the European Central Bank "can afford some easing of the policy stance".