IMF warns of downturn risk in debt bubbles

BUBBLES in consumer debt cause more entrenched recessions and longer slumps in the housing market, according to a study by the International Monetary Fund (IMF).

The IMF pointed to economic downturns that have hit harder in countries such as the US and the UK, where sharp growth in levels of household debt were matched by rising house prices.

Subsequent slides in property values mean debts became unmanageable during a slump, the IMF found.

Its researchers said lowering interest rates and “bold and well-designed government policies” to keep a lid on household debts can be used to tackle such spiralling recessions.

“These programmes help reduce reinforcing cycles of declining house prices and lower aggregate demand,” the report said.

The IMF’s world economic outlook also warned countries that rely on commodities to brace for lower prices thanks to weaker global demand.

The body’s baseline projections foresee a decline in commodity prices during 2012-13, with the risk of further falls if world economic growth slows.