"Perfect Storm" Brewing For Western Economies

IMF Warns Of 'Perfect Storm' That Could Drag Britain Into Recession

By ALEX BRUMMER
Last updated at 08:47am on 29th November 2007
DailyMail

One of the world's leading financial experts has warned that a "perfect storm" could be about to hit Western economies.

There is rising concern that the U.S. economy will slip into recession next year dragging many Western economies - including Britain - down with it as the global credit crisis worsens.

The Washington-based International Monetary Fund has warned of a "perfect storm" caused by surging oil prices and the turbulence on the world's financial markets.

Its chief economist, Simon Johnson, said: "The combination of the global credit crunch and high oil prices could bring a big reduction in international trade from which no one would be immune."

Mr Johnson cautioned that the current projections for the American economy and those of Europe are "too optimistic" and would have to be downgraded.

Only last month, in its World Economic Outlook report, the IMF suggested the U.S. and the West would weather the current storms on financial markets but lowered its growth forecast for the American economy to 1.9 per cent this year and next from 2.9 per cent in 2006.

The Federal Reserve, the U.S. central bank, joined in the gloom.

It reported in its analysis from the American regions that "mortgage delinquencies are up significantly in many areas" and "homebuilding is not expected to recover until well into next year".

Britain's largest bank said it was "nervous about how the UK housing bubble will unwind".

HSBC believes the Bank of England may have to lower interest rates far more aggressively than has been expected if Britain is to avoid a crash in house prices.

HSBC says it expects the Bank of England to lower interest rates by 1.25 percentage points to 4.5 per cent by early 2009 as it seeks to repair the damage to the economy caused by the end of the house price boom and slowing output.

It also expects the pound to plummet against the American dollar, dropping back to $1.80 from last night's price of $2.07.

Investment bank Goldman Sachs cautioned that the shock waves from the American mortgage crisis meant growth in the American economy would slip to just 1 per cent next year and warned of a "recession risk".

There are increasing signs that the slowdown in the U.S. economy is shifting from housing and construction to overall output including orders for new cars, which fell by 1.4 per cent in October.

Demand for housing and cars have long been regarded as the cornerstones of American growth.

The latest data led London-based forecasters Capital Economics to predict that output in the U.S. will fall in the final months of this year.

If it were to fall for two consecutive quarters the American economy would be in recession.

Among the main causes of the current gloom about the global economy is the fall out from the collapse of the U.S.'s "trailer park" mortgage market.

The Bank of England has warned that credit conditions are tightening which means that the cash available for lending to consumers, housing and industry will shrink dramatically.

Evidence of the slowdown on the High Street came from DSG, which owns Curry's and PC World, warned that sales of items such as refrigerators and washing machines have slowed and is cautious about prospects for next year.

But there was some relief from world oil markets yesterday where the price tumbled 4 per cent to $90-a-barrel - well short of the near $100-a-barrel touched earlier this week.

Prices retreated after the American government announced that stockpiles in the U.S. are far larger than expected.