IMF warns of double dip in housing market

Lack of new jobs may trigger falls in UK prices as global recovery remains sluggish
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The world economy faces a marked slowdown later this year with "persistently high" unemployment, and Britain runs the risk of a "double dip" in the property market, according to the International Monetary Fund.

The IMF's latest World Economic Outlook, published yesterday, warned that UK house prices were still high and "worrisome", despite measures – such as two stamp-duty holidays – being taken to boost demand.

"What remains worrisome... is that house prices are still high based on traditional valuation yardsticks, and policy support may not be enough to prevent further correction," the IMF report said. "If employment creation remains low, risks of a double dip in housing naturally increase."

The "real-estate quagmire" may hold back recovery, especially in Spain and Ireland, it added.

Compared to its last look in July, the IMF has revised its forecast for global growth in 2010 slightly upwards – by 0.2 per cent to 4.8 per cent – and for 2011 down by 0.1 per cent to 4.2 per cent. The second half of 2010 and the first half of 2011 will witness a "temporary slowdown", with advanced economies expanding by just 1.75 per cent on an annualised basis. However, the IMF claimed the risk of a technical "double dip" recession – two successive quarters of contraction – was less than 5 per cent.

The global growth figures disguise large disparities in the prospects for emerging and established economies. For example, growth in India is set to be 9.7 per cent this year and 8.4 per cent next year. In China, it will be 10.5 per cent in 2010 and 9.6 per cent in 2011 – back to pre-recession levels. By contrast, many European economies will scarcely grow and may contract.

Spain will be the sick man of Europe, the IMF predicted, shrinking by 0.3 per cent this year and growing by just 0.7 per cent in 2011. As Spain is the fourth-largest eurozone economy, that will give policymakers cause for concern.

As was presaged in its recent report on the UK, the IMF said Britain would grow by 1.7 per cent in 2010 and 2 per cent in 2011. The latter was a more bullish estimate than has been offered by many independent forecasters.

Even so, the "downside risks remain elevated" across the world, and the IMF urged many more nations to frame "growth-friendly" deficit reduction programmes. "Fiscal adjustment needs to start in earnest in 2011," it said. "Specific plans to cut future budget deficits are urgently needed now to create new room for fiscal policy manoeuvre. If global growth threatens to slow appreciably more than expected, countries with fiscal room could postpone some of the planned consolidation."

This last plea seemed to be particularly aimed at Germany, whose resurgent economy is, her critics say, able to withstand the strain of running a bigger deficit than planned.

The fund also repeated its call for more balanced growth both within economies and between them, and, with little disguise, called on China once again to revalue its currency, spur domestic demand and boost imports from deficit nations, notably the US. The IMF said progress on addressing these and other "global imbalances" had stalled recently.

The Bank of England announces its latest decision on interest rates and quantitative easing at noon today. The IMF has backed moves by central banks to extend the monetary easing, including the electronic creation of money via QE. The Bank may heed the IMF's advice next month.

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