Worst of the credit crunch is still to come, top economist warns

The worst of the global credit crunch is yet to come, a former IMF chief economist has warned.

Kenneth Rogoff said that the world’s economy faces further problems in the months ahead, and predicted that at least one major U.S bank will go under.

His comments come as a new report claimed that some areas of the country will take eight years to recover from the current housing market downturn.

Estate agent Savills said that a full recovery in house prices is not expected in the North East and Northern Ireland until 2016.

Rogoff's stark warning had a direct impact on shares in British banks today with Barclays shares down 4 per cent in early afternoon trading.

Speaking at a financial conference he said: ‘ I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'.’

'We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks.'

Rogoff was the International Monetary Fund's chief economist from 2001 to 2004 and is now an economics professor at Harvard University.

'We have to see more consolidation in the financial sector before this is over,' he said, when asked for early signs of an end to the crisis.

'Probably Fannie Mae and Freddie Mac. These giant mortgage guarantee agencies are not going to exist in their present form in a few years.'

House prices in some parts of the country will not recover until 2016, Savills has warned

In a warning sure to be heeded by the Bank of England, Rogoff said that the U.S Federal reserve had been wrong to cut its interest rates so dramatically.

He said: 'Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States.'

Savills said that house prices in London, the South East and Scotland are likely to have returned to their 2007 levels by 2012.

The group said property transactions were currently running at half of last year's level, while the number of new homes being built is expected to
continue to fall.

As a result, it said, supply was likely to become constrained in many markets over the coming months, leading to sharp price increases in certain areas of the country once demand began to increase again.

Yolande Barnes, head of Savills residential research, said: 'This property market downturn has affected virtually all property sectors and UK regions simultaneously but regions will vary far more when the upturn comes.

'The lack of turnover and new supply which is such a feature of the this downturn will be likely to lead to sharp increases in value in high demand, low supply areas.

'Competition amongst homeowners will once again lead to rising prices, particularly in those areas with higher levels of housing market equity and stronger household purchasing power such as London, the South East and Scotland.'

The group said the current downturn was severe and was likely to last for at least
another year, with homes losing 25% of their value between 2008 and 2010.