IMFsays U.S. heads for recession

WASHINGTON (Reuters) - The U.S. economy is headed forrecession this year and there is a 25 percent chance worldgrowth will drop to 3.0 percent or less, a level that would beconsidered recessionary, the International Monetary Fund saidon Wednesday.

The IMF said the global expansion of the last five yearswas fast losing ground in the face of a major financial crisisbrought on by a downturn in the U.S. housing sector thatcontinues "full blast."

The IMF's latest World Economic Outlook put world growth at3.7 percent this year, the second time in four months theglobal watchdog cut its forecast.

In October, it had looked for growth of 4.8 percent, aforecast it had lowered to 4.1 percent in January to try toaccount for the world's fast-spreading credit woes.

The IMF sees only a bit of a pick-up next year, with growthreaching 3.8 percent, somewhat slower than that following the2001 U.S. recession.

In the United States, growth in economic output will skidfrom a subpar 2.2 percent in 2007 to a bare-bones 0.5 percentthis year and 0.6 percent in 2009, the Fund said.

But U.S. Treasury's Undersecretary for InternationalAffairs, David McCormick, said the IMF's forecast for theUnited States was "unduly pessimistic," also acknowledging thata "significant downturn was underway.

"Those numbers, in terms of the outlook for the UnitedStates in 2008 and 2009, as well as the outlook for otherregions around the world were significantly below consensus,"McCormick told a news conference.

IMF chief economist, Simon Johnson, said a large housinginventory overhang suggests the U.S. housing correction wouldcontinue for some time. This would combine with a "broaderweakening" of the U.S. economy affecting consumers andconsumption and related strains in the labour market.

FALLING HOUSE PRICES

Johnson said the IMF expects U.S. house prices to drop inthe order of 14 to 20 percent to the end of 2008.

"That is a fairly large decline by historical standards inthe United States; it is a very large decline, but is notunprecedented compared to the experience of other advancedeconomies in past 30, or so, years," he added.

Meanwhile, the IMF said Western Europe would be affected bythe downturn in the United States, cutting the growth outlookfor the euro zone to 1.4 percent this year, down from a Januaryforecast of 1.6 percent and off sharply from last year's 2.6percent expansion.

For 2009, it expects euro-zone growth of just 1.2 percent.

The IMF cautioned that financial market strains wouldpersist until there was greater clarity about the extent anddistribution of losses on structured securities, and untilbanks rebuild capital and strengthen their balance sheets.

Johnson said the first line of defence for governments indealing with the crisis was monetary policy, followed by fiscalmeasures. The use of public money should only be considered "insensible ways to prevent problems from getting worse."

ABOVE-TREND GROWTH

In contrast, emerging and developing economies have so farbeen less affected by the financial market turbulence and theirgrowth is set to remain above trend, led by China and India.

The IMF said, however, there were signs economic activitywas starting to moderate in some emerging and developingcountries. Here, countries would not always remain insulated,especially if the U.S.-led downturn worsened, it added.

Meanwhile, rising inflation in the developing world fromhigher food and energy prices, and overheating pressures aseconomic growth outstripped potential, were the biggestimmediate challenges for policy-makers, the IMF said.

In Asia, robust inter-regional trade has helped to insulatethe region from the slowdown in the West, although a sharperdownturn could pose problems for export-dependent nations.

It said Japan and the emerging economies of Asia havelimited direct exposure to U.S. subprime securities but wouldsuffer spillover in the export sector if demand weakened.

The economic expansion in regional growth locomotive Chinais projected to moderate to 9.3 percent this year from 11.4percent in 2007, while growth in India is expected to slow to7.9 percent from 9.2 percent last year.

(Editing by Andrea Ricci)