World economy heading for 'perfect storm'

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

Dire warning: IMF's Simon Johnson

There is rising concern that the US economy will slip into recession next year dragging many 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 financial markets.

Its chief economist, Simon Johnson, said yesterday: 'The combination of the 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 that the US and the West would weather the storms on markets, but lowered its growth forecast for the American economy to 1.9% this year and next from 2.9% in 2006.

The Federal Reserve, the US central bank, joined in the gloom. Its analysis from the American regions said 'mortgage delinquencies are up significantly in many areas' and 'home building is not expected to recover until next year'.

Britain's largest bank said it is 'nervous about how the 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 house prices crash.

HSBC says it expects the Bank to lower interest rates by 1.25 percentage points to 4.5% 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.

The Bank has warned that credit conditions are tightening, so cash for lending to consumers, housing and industry will shrink.

Evidence of the slowdown on the High Street came from DSG International, which owns Currys and PC World. It 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 oil markets yesterday. The price tumbled four per cent to $90 a barrel - earlier this week it was near $100 a barrel - after the US government said stockpiles in America are far larger than expected.

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