THE International Monetary Fund has urged United States policy makers to strengthen their response to the housing slump and that the European Central Bank lower interest rates to stave off a global recession.
The Washington-based lender estimated a 25-percent chance of a worldwide economic downturn in its semiannual World Economic Outlook, released yesterday and obtained by Bloomberg News. The fund lowered its global growth forecast to 3.7 percent this year from a 4.1-percent prediction in January.
The fund anticipates a "mild recession" in the US, with expansions slowing in Europe and Japan. While central banks have acted "aggressively" to inject cash into the financial system, further efforts may be needed because of the danger of a "full-blown credit crunch," the IMF said.
"In the advanced economies, the pressing tasks are dealing with financial market dislocations and responding to downside risks to growth," the fund said in today's release.
Most IMF executive board members judged that the Federal Reserve may need to lower interest rates further. The US central bank has already reduced its benchmark rate by three percentage points, since September, to 2.25 percent.
"Room may need to be found for some additional public support for housing and financial markets," the fund said. The Bush administration has opposed using government funds to purchase mortgages or mortgage-backed securities, as proposed by some US law makers.
This is the third time the IMF has lowered its projections since July, when it predicted global growth of 5.2 percent this year. IMF economists said the deterioration was due to the "largest financial shock since the Great Depression."
The fund also warned that the new forecasts are more likely to be revised down than up. "The greatest uncertainty comes from the still-unfolding events in financial markets," the report said. Still, "a number" of the fund's executive directors judged that "the staff's new baseline forecast has been marked down too sharply."
Fund economists broke with their tradition of urging fiscal restraint, arguing that countries should consider using tax and spending policies to cushion the slowdown.
"Fiscal policy can play a useful stabilizing role in advanced economies in the event of a downturn in economic activity, although it should not jeopardize efforts aimed at consolidating fiscal positions over the medium term," the report said. Stimulus should be "timely, well-targeted and quickly unwound."
Central banks are facing a "delicate balancing act between alleviating the downside risks to growth and guarding against a buildup in inflation," the report said.