World economy in severe recession: IMF

[Naveed Yaseen]

WASHINGTON: The International Monetary Fund said on Wednesday the world economy has fallen into a severe recession, cutting its forecast for global growth and calling for forceful action to spur a recovery.

In its latest World Economic Outlook, the IMF said the global economy would likely contract 1.3 per cent this year in the deepest post-World War Two recession by far.

Growth is set to re-emerge to around 1.9 per cent next year, a pace more sluggish than average recoveries because of lingering strains in the financial sector, it added.

Just three months ago, the IMF had projected global growth of 0.5 per cent but two months later warned it would fall into deeply negative territory.

The Washington-based institution said its revisions to the global outlook stem from assumptions that financial markets will take longer than previously expected to stabilise.

The Fund warned that the turnaround depends on efforts by governments to nurse the global financial sector back to health by cleaning banks’ balance sheets, and on additional fiscal and monetary policies in advanced economies.

“A key concern is that policies may be insufficient to arrest the negative feedback between deteriorating financial conditions and weakening economies in the face of limited public support for policy actions,” the IMF said.

The IMF said stimulus measures should at least be sustained, if not increased, in 2010, and it warned that premature withdrawal of stimulus could set back a recovery.

It said interest rates in major advanced economies are likely to be lowered to or remain near zero, and added that where there was room for further easing, authorities should move quickly to cut interest rates.

The IMF said the United States remains at the epicenter of the crisis and said it is critical US authorities address mounting toxic debt and uncertainty about banks’ solvency.

It revised down its forecast for the US to a 2.8 per cent contraction this year and no growth in 2010 as the ravages of a credit squeeze, falling house and equity prices and high levels of uncertainty play out.

Meanwhile, the euro zone economy will shrink by 4.2 per cent this year and fall a further 0.4 per cent in 2010, the IMF said, criticising the bloc for weak public policy responses and coordination.

It said coordinating financial policy was especially necessary to deal with problems building in Europe’s financial systems, related to deteriorating loan books, particularly for exposures to emerging Europe.

It warned that the recession would be “particularly severe” in Ireland and “quite severe” in the United Kingdom and that unemployment in advanced European economies would rise above 10 per cent in late 2009 and keep climbing until 2011.

Emerging European economies were seen shrinking around 3.75 per cent in 2009 and growing just 1 per cent next year, compared with growth of 4 per cent to 7 per cent between 2002 and 2007.

The IMF said the Commonwealth of Independent States were worst affected of all regions, facing a dramatic economic collapse as the credit crisis, slumping demand and energy prices deliver a series of painful blows.

It predicted the former Soviet economies would shrink by 5.1 per cent this year and grow by just 1.2 per cent in 2010, compared with a solid 5.5 per cent pace of expansion in 2008.

In Asia, where countries are being harder hit by a drop in global trade than by the financial crisis, the IMF said Japan’s recession would be far deeper than previously thought, while China’s economy will grow at a much slower pace.

In Japan, the IMF expects 2009 output to fall 6.2 per cent, far worse than its January forecast for a 2.6 per cent decline. -Reuters

For China, the IMF trimmed its 2009 growth forecast to 6.5 per cent from 6.7 per cent, which would be half the growth rate recorded in 2007, and down sharply from last year’s 9 per cent.

It said the hard-won gains in Africa are being threatened by the global downturn, which is reducing demand for African goods and curtailing worker remittances.

The crisis also has not spared the Middle East, where the large drop in oil prices is hitting the region and reversal of capital flows are also taking a toll.

The same is true for countries in Latin America that are being hit by commodity price drops and where the biggest threat is a protracted financial deleveraging in advanced economies that will lead to a prolonged halt in capital inflows, the IMF said.

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