The fall-out from America’s sub-prime mortgage market and the tightening financial conditions that it has triggered could jeopardise prospects for a revival in the American economy next year, the International Monetary Fund said last night.

The US outlook remains favourable, with the world’s biggest economy still on course to see its present downturn, triggered by a housing market slump, end in a “soft landing”, followed by a rebound next year, the IMF said.

In its annual healthcheck of US economic conditions, however, the IMF also highlighted a series of “important risks to this outlook”. It said that US growth was “uncomfortably close to the ‘stall speed’ associated with past recessions”, although it noted that this anxiety was tempered by the fact that unemployment in the United States and real-terms interest rates were more favourable than those before previous such episodes.

The upheaval in the US sub-prime home-loans market, with growing numbers of high-risk American homebuyers now defaulting on their mortgages, was singled out in the IMF’s analysis as a key danger that could undermine economic recovery into next year. The mortgage market disruption “could extend the housing downturn”, the IMF found. In turn, that could “weaken consumption, and financial conditions could tighten”.

At the same time, the report suggested that the Federal Reserve might find itself boxed-in over responding to such difficulties with lower interest rates, since a combination of a lack of spare capacity, low unemployment, elevated commodity prices and falling productivity could lead to rising costs boosting inflation.

Despite these worries, the IMF said that the “most likely scenario” remained that there would be a resurgence in US growth in 2008, after cooling by more than was previously predicted this year, thanks to the housing slump combining with unexpected weakness in business investment and export performance, and moves by companies to cut back their stocks. It noted that consumer spending “continued to grow robustly”, while employment conditions had stayed strong and growth abroad had picked up. Although it expressed concern over tightening credit conditions triggered by sub-prime troubles, the IMF emphasised that the US financial system “has shown impressive resilience”.

The fund’s main forecast is now for the American economy to grow by 2 per cent this year – well below the long-term average – but then accelerate to expand by 2.75 per cent in 2008.

While the IMF noted that the vast US current account deficit had stabilised at about 6 per cent of national income in 2006, it said that the dollar would need to fall further if this symptom of deep-seated global imbalances was to be unwound. “Staff analysis suggests that further dollar depreciation would be required over time to realign with fundamentals,” it said.

The IMF also renewed its calls for the US Government to do more to curb the cost of “unsustainable” welfare support, despite its noting a “highly favourable” short-term trend of a sharply declining budget deficit.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts