Last updated 14:49, Monday, 31 March 2008

Fall street? Economic problems for the USA will spread quickly to other countries including the UK

An influential report has warned thast the world’s biggest economy is on the verge of recession, which could spell major problems for the UK.

A draft version of the International Monetary Fund’s World Economic Outlook concluded the US economy “remains very weak, certainly close to a possible recession”.

The report is due to be published ahead of a meeting next month, and was leaked to Italian news agency Ansa.

The verdict comes after the cash crisis and cut-price rescue of troubled US investment bank Bear Stearns sent markets plummeting at the beginning of the week.

The Federal Reserve, the US central bank, dropped its main interest rate by three quarter-points on Wednesday – the latest in a series of cuts which have seen the rate trimmed by two per cent in the first three months of this year – and three per cent since the credit crunch first erupted in global markets last August.

The moves come as the Fed attempts to rescue the US economy from the brink of recession and ease the pressure on the banking system.

Nigel Gault, chief US economist at Global Insight, a worldwide economic forecasting and consultancy firm, said he believed the US was in recession already – and that spelled problems for other countries, including the UK.

He said: “The US has, for years, been the primary motor for growth in the global economy.

“However, now consumer spending in the US has seen a downturn, the tables are turned, and the US is looking to the rest of the world for support, through strong export growth, and cutting imports.

“This is happening, US exports are doing extremely well, but it’s not enough to keep the economy out of recession.

“We do not expect to see the problems in the housing market in the US bottoming out before 2009, and while spending will be helped by tax rebates to be given this summer, that may give only temporary relief, and in the first quarter next year growth may dip back close to zero.

“The longer either the recession or period of weak growth goes on, the longer the US market is going to be weak, and very difficult for anybody trying to sell goods to it.”

Jeremy Batstone, head of research at stockbrokers Charles Stanley, said the IMF “has a history of driving the car using the rear view mirror”.

He added: “For the whole of 2007, it was not looking through the windscreen, it was merely reporting what the prevailing economic data releases were telling it.

“This report suggests nothing has changed, the IMF using backward-looking data is taking the view that the US economy might be in recession.

“Recent economic releases make it entirely clear that the US economy is already in recession, it’s confirmed by diverse economic statistics, including retail sales, sharply falling house prices, rising unemployment, deteriorating industrial production and manufacturing output.

“The 64,000-dollar question, indeed the 64-trillion dollar question, is not what happened in the first quarter, but what might happen in the second quarter, and beyond that.

“The hope among economists is that radical action by the US Federal Reserve might be enough to nip this crisis in the bud, and maybe there can be gradual recovery in the second quarter of the year, but at the moment we just don’t know.”

The bank holiday brings a pause in efforts to create stability in the London markets after a week of stock market turmoil for the biggest companies.

The Bank of England pumped an extra £5 billion into frozen money markets this week.

Its second such move in three days came as it held talks with the heads of major banks starved of cash in the credit crunch.

The FTSE 100 Index finished nearly one per cent lower, with the leading share index down 2.5 per cent overall after four days of volatile trading and the launch of a probe into claims of market abuse.

The Bank’s £5 billion extra brought its total funding available to £10.9 billion yesterday, though financial institutions called for almost three times as much.

The increased funds will be made available until the beginning of April.