Asian Boom Helps World Economy to Shrug Off Us Housing Market Decline

The International Monetary Fund last night said booms in China, India and Russia would allow the global economy to shrug off the impact of the crisis in the American housing market and post faster-than-expected growth this year.

Updating its spring forecast, the Washington-based fund said it expected the world economy to expand by 5.2% in both 2007 and 2008 - a 0.3 point increase in both years - and a continuation of the strongest period of growth across the globe since the late 1960s and early 1970s.

In contrast to the western-dominated global economy of four decades ago, the fund said the two former communist countries of Russia and China, together with the world's second most populous nation, India, would be responsible for more than half the 5.2% growth this year.

Charles Collyns, the fund's deputy director of research, said the Chinese economy was now on course to expand by 11.2% this year. "China seems to be going from strength to strength at this point. It's hitting on all cylinders," he said.

The strength of the leading developing economies would offset slightly weaker than predicted growth in the US this year. The IMF said it now believed the US, the world's biggest economy, would grow 2% this year, down from the 2.2% expected when it published its world economic outlook in April. Despite figures yesterday showing a fresh fall in sales of US homes to a five-year low, the fund said the damage from the troubled American housing market was "likely to remain contained".

Growth projections were also revised higher in the euro area, particularly in Germany, where the negative effects of a value-added tax increase on consumer spending were not as bad as previously forecast. German growth was raised by 0.8 points to 2.6%, while Japan also saw its growth revised up by 0.3 points to 2.6% as domestic demand strengthened. Forecasts for the UK were unchanged for both 2007 and 2008 at 2.9% and 2.7% respectively.

The IMF stressed that the long period of sustained growth meant that global inflation risks were growing, pointing to the rising cost of energy, commodities and labour. Central banks were more likely to respond by pushing up interest rates.

"There are concerns that inflation pressures may be picking up, and central banks will need to respond quickly and in a forward looking way to these pressures," Mr Collyns said. The fund warned, however, that widening spreads caused by defaults on subprime mortgages - loans to individuals with poor credit ratings - posed a risk to financial markets. It noted that investors had less appetite for leveraged loan investments, which could put pressure on banks financing and underwriting leveraged buyout deals.

"While the degree of leverage has continued to rise, some investors are becoming reticent to accept so-called 'covenant lite' loans where creditor protections have been loosened," the fund said in a separate financial market update statement.

The figures released yesterday in Washington showed no let up in the decline of the US housing market. Sales of existing homes fell for the fourth successive month in June, at an annual rate of 5.75m, down almost 4% on the month.

Sales activity was at its lowest since November 2002, according to the official figures. Wall Street took no notice of the weak housing data, with the dollar gaining a cent against the pound in a broad-based rally and the Dow closed up 68.12 points at 13,785.1 in New York.

Dimitry Fleming, analyst at ING, said: "The slowdown in the US housing market is turning uglier by the month. From the peak in February 2007, sales have now dropped 14%. And there's nothing in today's report to suggest that we are nearing the end."

With high levels of unsold homes, Mr Fleming said he expected prices of real estate to carry on falling. "As long as prices remain in negative territory, buyers will continue playing the waiting game."