U.S. to narrowly avoid recession -bank lobby group

WASHINGTON, Jan 10 (Reuters) - The United States will narrowly avert a recession in 2008 even as the economic drag from the subprime mortgage crisis persists and losses from financial turmoil increase, a lobby group said on Thursday.

The Institute of International Finance said that while the mess in the market for U.S. subprime home loans, which are extended to those with risky credit, still posed problems, a bigger burden will come from spillovers from turmoil in investment ties to the housing market, especially at major banks. This is likely to be accompanied by more cautious spending from households and businesses, it said.

"Our view is that a recession is not the most likely outlook, although a phase of below-trend growth seems in prospect," the lobby group said in its Global Economic and Capital Markets Forecast report for 2008.

The Washington-based IIF said the United States would be spared a recession with the help of Federal Reserve interest rate cuts, a vibrant corporate sector and strong demand for U.S. goods abroad.

The U.S. housing-induced financial damage had spread to Europe and knocked fragile confidence in Japan, all of which has prompted a moderate slowing in global growth, it added.

It forecast that the pace of global growth would ease to 3.1 percent this year from 3.5 percent in 2007.

A healthy global corporate sector combined with cuts in U.S. benchmark interest rates should make for a rebound in global growth in the second half of the year, it added.

It said a sharp, broad-based rise in global headline inflation, brought on by large increases in food and energy prices, should peak in early 2008.

It still posed challenges to policymakers, the IIF said, adding that further rate cuts by the Fed -- the U.S. central bank -- risked entrenching inflation expectations at levels that may become troublesome by late 2008 and beyond.

A further worry was that core inflation would build globally later into the year as excess global liquidity makes its way into prices and as high commodity input prices feed through to broader measures of goods and services prices.

The IIF said depreciation of the dollar .DXY would likely continue, adding: "Despite a near-term respite, we would not be surprised to see the dollar weaken again through Q1, especially as U.S. data turn weaker and the Fed cuts interest rates again at the end of January."

It said the yen JPY= would likely remain undervalued until the Bank of Japan is able to lift rates, while it forecast that the euro EUR= at 1.50 versus the dollar would probably strengthen to 1.60 "producing howls of pain" from European industry. (Reporting by Lesley Wroughton; Editing by James Dalgleish)