IMF sounds the alarm bells over worldwide slump

The International Monetary Fund tonight warned that America will slump into recession following "the largest financial shock since the Great Depression".

It slashed its growth forecasts for both America and Britain and warned there is now a one-in-four chance of a global recession as the credit crunch bites.

"The US economy will tip into a mild recession in 2008 as the result of mutually reinforcing cycles in the housing and financial markets," it said in its World Economic Outlook in Washington tonight. It was the first major international institution to declare that the US faces recession this year.

"The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression, inflicting heavy damage on markets and institutions at the core of the financial system," the report said.

It predicted global growth of just 3.7% - the slowest for five years - but added there was a "25% chance of growth slowing to 3% or less in 2008 and 2009, equivalent to global recession".

The warning from the IMF, led by managing director Dominique Strauss-Kahn, came as it slashed its growth forecasts for Britain to 1.6% this year and again in 2009. Such sluggish expansion over two years would be the weak-est since the early 1990s.

It was an embarrassment to Chancellor Alistair Darling, who last month forecast growth of around 2% this year and 2.5% in 2009, and came a day after the Halifax reported the sharpest fall in house prices in Britain since September 1992, and piled pressure on the Bank of England to cut interest rates tomorrow from 5.25% to 5% despite rising inflation.

The pound crashed to a record low against the euro, breaching the 80p mark for the first time since the single currency was launched in 1999 at 66p. It recovered slightly but was also down against a basket of other currencies.

There was better news from the manufacturing sector, however, as output from British factories rose at the fastest pace since December 2006 despite the credit crunch and slowing economy. But economists said that the robust performance will not stop the Bank of England cutting rates tomorrow given the gloom elsewhere.