IMF warns similarities to great depression

[Naveed Yaseen]

LONDON: The International Monetary Fund (IMF) has warned of worrisome parallels between the current global crisis and the great depression, despite the unprecedented steps already taken by central banks and governments worldwide.

“This recession is likely to be ‘unusually long and severe, and the recovery sluggish,” IMF, releasing two advance chapters from its World Economic Outlook, said.

Synchronised world recessions striking all major regions are ‘historically rare’ events, IMF said. They last one and a half times as long typical downturns, and are followed by painfully slow recoveries.

“The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today.”

However, it warned there is a risk that it could spiral down into a full-blown slump unless further action is taken to stop ‘feedback effects’ gathering force.

Head of the IMF Dominique, Strauss-Kahn said millions of people risk being pushed back into poverty as the economic storm ravages the most vulnerable countries.

“The human consequences could be absolutely devastating. This is a truly global crisis, and nobody is escaping,” he said.

While no countries were named, this would raise questions about Japan, Germany, France, Italy and ultimately Britain and the US after their bank rescues.

The IMF said the US is at the epicentre of this crisis just as it was in the depression, setting the two episodes apart from normal downturns. The IMF said the global financial system is still under acute stress, with output tumbling and inflation falling towards zero in key nations. “The risks of debt deflation have increased,” it said.

Abrupt halts in capital flows can have ‘dire consequences’ for emerging economies, it said. Eastern Europe has already suffered the effects, with a 17.6 percent fall in industrial production in February. The region is highly vulnerable to the credit crunch since it owes more than 50 percent of its GDP to Western banks. Strauss-Kahn called for an urgent action to ‘cleanse banks’ of toxic assets and for further fiscal stimulus beyond the 2 percent of global GDP already agreed. The snag is that high-debt countries may have hit the limits already.

“The impact becomes negative for debt levels that exceed 60 percent of the GDP,” said IMF. daily times monitor

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