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The World Economic Situation and Prospects 2007 singles out the possibility of a more severe downturn in the United States' housing markets as the key risk for the global economy. A number of economies have witnessed substantial appreciation of house prices over the past decade, and the associated wealth effects have contributed to relatively strong economic growth rates. A reversal of the process may thus lead to significant negative fallout for world economic growth. The risks associated with the housing sector are serious also because of the inextricable linkage between the increase in house prices and global imbalances. The housing booms in countries running large external deficits are being indirectly financed by borrowing from the high-savings countries running external surpluses. Therefore, a collapse in house prices in major economies would provoke a contractionary and abrupt adjustment of global imbalances. Intensive macroeconomic policy coordination between major economies will be needed to prevent a disorderly global adjustment. The report spells out the conditioning factors for effective policy coordination and the key areas to be agreed upon.
Sales No. E.07.II.C.2
ISBN 978-92-1-109153-3