SINGAPORE: The United States looks set to be headed for a protracted economic downturn, according to the International Monetary Fund (IMF).

Banks remain key in transmitting financial turmoil to the real economy and IMF expects the recovery period for a banking sector-related downturn to be twice as long as other slowdowns.

Presenting a key chapter in its World Economic Outlook report on Monday, IMF said the financial sector in Europe does not seem as vulnerable as the one in the US. It added that the Japanese economy is in a relatively strong position.

Roberto Cardarelli, head, Regional Studies Unit, Asia & Pacific Dept, IMF, said: "Japan is relatively better positioned in terms of financial imbalances... house prices, for example, didn't increase that much.

"The household sector is in a very strong position in terms of balance sheet in Japan, so it certainly looked less exposed on these dimensions than the Euro area and the US, especially to the real consequences of the financial turmoil."

The IMF said the credit position of households and companies is a good indication of whether an episode of financial stress will develop into an economic slowdown or recession.

"Previous research done at the Fund shows that even monetary policies should look at real house prices – not only when they collapsed, but also when they go up. Get information of probability that financial imbalances are building up in the economy," said Mr Cardarelli.

For now, the IMF said there is no telling if the financial crisis in Europe will turn out to be as serious as the one that hit America. But it said every step that goes into restoring confidence in the banks and improving their solvency is a step in the right direction.

The Fund said it is important for authorities to take action to help banks re-capitalise and get back in shape.


- CNA/so