IMF: WORLD ENTERS MAJOR DOWNTURN

the imf released its october world economic outlook last week, and stated: "the world economy is entering a major downturn in the face of the most dangerous financial shock in mature markets since the 1930s"

while the stark wording of the report is clearly designed to spur governments around the world into action, the imf reports are solid pieces of rigorous research.

if we remember that everything started with irrational house prices, it includes a graph on page 37 indicating the gap between where house prices are, and where they should be, according to their fundamentals, such as long term average ratios of rental prices to house purchase prices, and salaries to house prices.

this suggests that while the us has come somewhat closer to its fundamental level, it still has 7% more to go, and past experience of course indicates that instead of settling nicely on its fundamental level, it might go well below it first. meanwhile, prices in most other industrialized nations are way above, with the uk exceeding it by more than 20%. all points to further declines in house prices, which is going to hurt consumer spending, increase loan defaults, further deteriorating the conditions of credit markets, in turn depriving businesses and consumers of the lifeblood of growth and consumption.

the reports in pdf format:

executive summary (english)
executive summary (chinese)
full report (321 pages, english)

other world economic outlook reports can be found here

the case-shiller index meanwhile continues to plummet, although not as heavily as before. us home prices in july were down 17% year-on-year, from 16% in june.