World economy to shrink by 0.5% to 1.0% in 2009

By Administrator |

In its most downbeat forecast ever, the International Monetary Fund (IMF) predicts that the global economy will shrink by between 0.5% and 1.0% this year, with developed countries entering 'deep recession'.

But according to an article in the IMFSurvey Magazine covering analysis provided to the Group of Twenty (G-20) industrialized and emerging market countries, global growth is still forecast to stage a modest recovery next year, conditional on comprehensive policy steps to stabilize financial conditions, sizeable fiscal support, a gradual improvement in credit conditions, a bottoming of the US housing market, and the cushioning effect from sharply lower oil and other major commodity prices.

‘Turning around global growth will depend critically on more concerted policy actions to stabilize financial conditions as well as sustained strong policy support to bolster demand,’ the IMF said. The analysis, prepared for this month's G-20 meeting in the UK [held between March 13?14-Ed] , was only made public on March 19, with the IMF stressing the need for countries implementing large fiscal stimulus packages to anchor crisis-related spending in the context of a credible medium-term fiscal framework, so that deficits do not get out of hand.

At the meeting, finance chiefs from the biggest developed and emerging economies pledged to take steps to make a ‘sustained effort’ to end the global recession and to cleanse banks of toxic assets ahead of the next summit of G-20 leaders in London on April 2.

But according to the IMF, none of this is likely to help much in 2009. It says that advanced economies will suffer deep recessions in 2009 and leading economies in the Group of Seven are expected to experience the sharpest contraction for these countries as a group in the post-war period by a significant margin. It points to a contraction of 5% in global GDP in the fourth quarter of 2008 and says that it still working on projections for several countries which it hopes to announce on April 22.

The IMF says that the 'mutually reinforcing negative feedback loop' between the stalling real economy and the still corrosive financial sector has intensified and prospects for recovery before mid-2010 are receding. ‘Delays in implementing comprehensive policies to stabilize financial conditions would result in a further intensification of the negative feedback loops between the real economy and the financial system, leading to an even deeper and prolonged recession,’ it says.

Turning to economic regions it says that in the United States the contraction in activity in 2009 is expected to push up the output gap to levels not seen since the early 1980s. It says that growth is unlikely until the third quarter of 2010, even assuming that financial market conditions improve relatively rapidly in the second half of 2009, based on the implementation of a detailed and convincing plan for rehabilitating the financial sector, as well as continued policy support to bolster domestic demand.

Meanwhile, it note that in the euro area the decline in activity in 2009 reflects a sharp collapse in external demand, the impact of housing market corrections in some member states (which began later than in the United States), and an intensification of financing constraints. The impact of falling external demand has been larger and policy stimulus more moderate than in the United States, though automatic stabilizers – such as unemployment pay and welfare payments – are somewhat larger in the euro area.

Turning to Japan it adds that the sharp fall in output reflects plunging net exports and business investment and faltering private consumption. The financial sector – though not at the epicenter of the crisis – is also suffering ill effects, weighing upon growth prospects.

Looking at emerging and low-income economies, the IMF says that growth will continue to be impeded by financing constraints, lower commodity prices, weak external demand, and associated spillovers to domestic demand. Activity is expected to expand only weakly in 2009 – before recovering gradually in 2010. It says some of these economies will suffer serious setbacks.

It says that Central and Eastern Europe and the Commonwealth of Independent States are the most adversely affected, given the region's large current account deficits. Several countries are also facing sharp contractions in capital inflows, with some of those who are worst affected including the Baltics, Hungary, Croatia, Romania, and Bulgaria.

Meanwhile, in Latin America it points to tight financial conditions and weaker external demand as a continuing drag on growth in the region, with growth in Brazil decelerating sharply and Mexico projected to enter a recession.
 At the same time, the IMF says that emerging Asia is being hurt through its reliance on manufacturing exports. The region's manufacturing activity has been particularly hurt by collapsing information technology exports. Growth in China is also slowing, albeit from a high rate (13% in 2007), and domestic demand is being supported by strong policy stimulus.

In Africa and the Middle East it also projects slowing growth, but on a more modest level than in other regions. In Africa, growth is expected to slow down particularly in commodity exporting countries, and several countries are experiencing reduced demand for their exports, lower remittances, and foreign direct investment, while aid flows are under threat. More reassuringly, it notes that in the Middle East, the effects of the financial crisis have been more limited. Despite the sharp drop in oil prices, government spending is largely being sustained to cushion the toll on economic activity.

Having said all of this, the IMF believes that global financial and economic conditions could rebound faster than anticipated if policy measures are credibly strengthened. It characterized the current crisis as partly a ‘crisis of confidence.’

In its statement it said: ‘While exceptional uncertainty far exceeds that seen during typical downturns, the right policies could help turn around confidence, providing a lift to spending and global growth. The key is dealing credibly with problem assets and concerns about banking solvency.

‘Restoring confidence is key to resolving the crisis, and this calls for tackling problems in the financial sector head on. Policymakers must resolve urgently balance sheet uncertainty by dealing aggressively with distressed assets and recapitalizing viable institutions.

‘Since financial market strains are global, greater international policy cooperation is crucial for restoring market trust. Monetary policy should be eased further by reducing policy rates where possible, and support credit creation more directly.’


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