The American economy faces a painful recession that will be deeper than the downturn at the start of this decade and the most severe since the early Nineties, the International Monetary Fund (IMF) is set to predict next week.

A leaked draft of the twice-yearly World Economic Outlook yesterday fuelled fears for American prospects, revealing that the IMF is to forecast US growth of a meagre 0.5 per cent this year.

If confirmed, this would mark a drastic cut in the IMF’s existing US projections to only a third of the previous expected growth rate of 1.5 per cent and point to the weakest year for the US economy since the recession of 1991, when GDP fell by 0.2 per cent.

The United States is to suffer at least two successive quarters of falling GDP, meeting the technical definition of recession, with the clear threat of a markedly worse outcome, the IMF is now expected to say.

The leak, to the German Die Zeit newspaper, also showed that the IMF is to cut its forecast for world GDP growth from 4.1 per cent, although it did not indicate the new forecast.

The leaked figures emerged as the IMF board issued a warning that worries over transparency and political manipulation relating to sovereign wealth funds were real and could be destructive. IMF directors said that adoption of a voluntary code of best practice could help to disperse some of the issues around wealth funds, which have helped to recapitalise US banks suffering from the sub-prime crisis.

The latest grim news over the US outlook came as Ben Bernanke, the Chairman of the Federal Reserve, is set to testify to Congress’s joint economic committee today and as further evidence emerged that a US recession has taken hold. The gauge of US manufacturing conditions from the Institute of Supply Management (ISM) showed activity shrinking for a second month in a row last month.

Norbert Ore, the economist who chairs the ISM’s manufacturing business survey committee, said that the data pointed to the worst quarterly performance since early 2003.

Oil is the key to world recovery

The shock of $140 oil has created inflationary and deflationary pressures that threaten world economy and policy tools

• Former President Bush energy adviser says oil is running out

BACKGROUND

• Oil is the key to world recovery

• Banks may need to pump billions into scheme

• UK economic growth weakest for three years

Related Internet Links

• Full credit crunch coverage

BACKGROUND

• Happy days are over for UK households

• Banks restrict mortgages by brokers

• Credit crunch halves lending at Nationwide

• JPMorgan to cut Bear Stearns jobs

• George Soros: Crunch will bite deeper in UK

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