IMF says U.S. recession will slow global growth

There's a risk that things could turn worse, it cautioned.

"The IMF now sees a 25 percent chance that global growth will drop to 3 percent or less in 2008 and 2009 — equivalent to a global recession," the fund said. "The greatest risk comes from the still-unfolding events in financial markets, particularly the potential for deep losses" on complex investments linked to the U.S. subprime mortgage market, the IMF said.

The sober IMF forecast comes days before the United States and other top economic powers are slated to meet Friday to discuss the problems and ways to deal with them. Talks will carry over into the weekend meetings of the IMF and the World Bank.

To limit the damage in the United States, the Federal Reserve has been slashing interest rates since last September and has taken a number of extraordinary measures to avert a financial meltdown, which would have dire consequences for the U.S. economy. The government, meanwhile, has enacted a $168 billion stimulus package of tax rebates for people and tax breaks for businesses.

Although the IMF said all these moves were appropriate, Johnson, nonetheless, predicted "significant strains in housing and credit markets are likely to be protracted."

House prices in the United States will continue to drop, with declines this year in the range of 14 to 20 percent, Johnson said. "The housing correction will continue for some time," he added.

Problems started in the United States with risky "subprime" mortgages made to people with blemished credit and quickly spread into other areas, hitting more creditworthy borrowers. Foreclosures in the U.S. hit record highs and financial companies racked up multibillion-dollar losses as mortgage-backed investments soured with the collapse of the U.S. housing market.

The fallout gripped investors on Wall Street and in other countries, creating a panicky atmosphere that threatened to paralyze financial markets in the United States and beyond. "The financial market crisis that erupted in August 2007," the IMF declared, "has developed into the largest financial shock since the Great Depression."

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