Saturday, October 04, 2008

IMF now sees “considerable risk” of recession for the U.S.

Sources:  Wall Street Journal: IMF Report: U.S. Faces ‘Considerable’ Recession Risk

Financial Times: US economy ‘vulnerable to downturn’

The IMF changed its tune quite significantly this week in a briefing released just ahead of their semi-annual Global Economic Outlook (due out Oct. 8th), saying that research now indicates that the U.S. faces a “considerable” recession risk.  Earlier this month, as reported on this blog, leaders of the IMF said they were “cautiously optimistic” about the global economy and the likelihood that the U.S. would avoid a recession despite the financial turmoil.

Now, however, new IMF research comparing the current episode of financial stress to past periods of stress has indicated that there is a “substantial likelihood of a sharp downturn” in the U.S. economy.  The study used past episodes of financial stress in 17 advanced economies to create a Financial Stress Index.  When historical results are compared to the current episode, the IMF believes we are seeing “one of the most intense” periods of stress in the U.S. and one of the most widespread globally.

The research also found that recessions are more likely to occur following financial turmoil when they are preceded by free flowing credit and high housing prices, as was clearly the case in the United States.  Also stacking up against the U.S. is the finding that economies with financial systems that include both traditional bank lending structures as well as so-called “arms-length” tradable securities tend to face deeper and more severe recessions following financial stress.

The briefing also stated that the current financial turmoil poses a “major threat” to global economic growth, though it indicated that the euro zone likely faces a slowdown, rather than a recession.

Discussion: Is there any way to avoid a recession in the U.S. at this point?  Will the $700bn U.S. government “rescue” plan that President Bush signed into law yesterday provide any relief?  Do you think that Europe will need to take similar action to avoid a euro zone recession?

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