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IMF Warns Housing Market could slow US GDP growth

Economics / US Housing Sep 17, 2006 - 09:35 PM GMT

By: Sarah_Jones

Economics

The International Monetary Fund warned that the U.S. economy is headed for a slowdown caused by a cooling housing market, and that could drag on global growth.

The IMF revised downward its forecast for U.S. economic growth to 2.9 percent for 2007 from an estimate of 3.3 percent in April. This year, the U.S. is seen expanding 3.4 percent, the fund projected in its semiannual World Economic Outlook.


But as U.S. growth appears to falter, much of the rest of the world has picked up steam, it said.

In addition to China, both Japan and Europe are expanding and the IMF raised its forecast for global growth to 5.1 percent this year and 4.9 percent next year - both up a quarter point from April.

"This is really the fourth year of very strong global growth," said Raghuram Rajan, the fund's chief economist in Singapore, where the IMF and its sister institution, the World Bank, will be holding their annual meeting next week.

Still, the IMF warned that inflationary pressures, high oil prices and a possible abrupt slowdown in the U.S. economy could restrain global growth.

"This strong central forecast is surrounded by more uncertainty than usual, with risks tilted to the downside," Rajan said.

"The forecasted (U.S.) housing slowdown is well and truly here," he said. "Indeed, rising inventories of unsold houses suggest things will get worse before they get better."

Last month, the Commerce Department reported that sales of new homes dropped 4.3 percent while the inventory of unsold homes climbed to a record high.

The IMF also said further U.S. interest rate hikes might be necessary as inflation remains a threat.

The Federal Reserve "faces a difficult situation of rising inflation in a slowing economy, but given the importance of keeping inflation expectations in check, some further policy tightening may still be needed," the report said. In August, the Fed decided to keep its key short-term lending rate at 5.25 percent after 17 straight hikes dating back to June 2004.

The U.S. could help reduce global imbalances by setting a more ambitious deficit reduction path and put the budget in a stronger position to respond to future economic downturns, the IMF said.

"Boosting national saving in the United States - through fiscal consolidation and increased private saving - is a key component of the multilateral strategy to reduce global imbalances," the report said.

Meanwhile, the IMF predicted that China's economy would continue to surge, rising 10 percent both this year and next, propelled by surging exports. But it expressed concerned about China's construction boom, which authorities have been trying to restrain.

The Washington-based fund also urged Beijing to raise the value of its currency, the yuan, saying that would help to cut its huge global trade gap - on pace to surpass last year's $102 billion - and bolster households' purchasing power.

Japan, the world's second-largest economy, will likely grow 2.7 percent this year on the back of solid domestic demand, but should ease next year to 2.1 percent, the IMF said.

Japan should be careful to raise interest rates gradually to avoid a "costly" reemergence of deflation, or falling prices.

In the 12-nation zone that uses the euro currency, stronger corporate balance sheets have helped bring about increased investment, rising employment and a more balanced expansion, the report said. Growth would rise to 2.4 percent in 2006 before moderating to 2 percent in 2007 largely due to scheduled tax increases in Germany, the report said.

Other risks to the outlook include further increases in oil prices, the fund said.

"Supply concerns have played a growing role in pushing up oil prices, and a major disruption in a large producer or a further escalation of security concerns in the Middle East could well lead to another upward oil price spike," the IMF said.

It seems obvious a falling Housing market in the US would impact on GDP growth, it seems like the IMF is well behind the curve, as the thought should not be towards less GDP growth but whether we will see negative GDP growth i.e. a recession in 2007 !


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