IMF: Economic Slump to Engulf the Globe

The warning from the IMF that still more far-reaching efforts were needed from leading developed and emerging market economies, and that these needed to be internationally coordinated, came as it forecast the worst global slump since the Second World War.

The world economy is now set to shrink by between 0.5 per cent and 1 per cent over this year, in its first outright contraction in the post-war era, the Fund said in grim new projections. Developed economies will contract by between 3 and 3.5 per cent, with an anemic recovery leading to only stagnation, with zero growth, in the rich world in 2010, it added.

Confirming figures leaked earlier this week, the IMF also forecast that the US economy will now contract by a brutal 2.6 per cent in 2009, and the eurozone by a still worse 3.2 per cent. Japan will likely suffer a 5.8 per cent contraction in 2009 and will continue to shrink in 2010 by 0.2 per cent, it found.

The bleak projections came in a report prepared for last week’s meeting of finance ministers and central bank governors from the Group of 20 leading economies.

“Turning around global growth will depend critically on more concerted policy actions to stabilise financial conditions as well as sustained, strong policy support to bolster demand,” the report concluded.

It emphasised that restoring confidence in financial conditions was vital to resolving the present crisis, and said this meant “tackling head-on the problems in the financial sector.

“Policy-makers must resolve urgently balance sheet uncertainty by dealing aggressively with distressed assets and recapitalising viable institutions,” it urged.

In an apparent rebuke to fractious G20 members bickering over what measures to take to combat global recession, the IMF added: “Since financial market strains are global, greater global policy cooperation is crucial for restoring market trust.”

It warned: “Delays in implementing comprehensive policies to stabilise 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.”

The fund’s forecasts also projected that emerging and developing economies will slow abruptly and are likely to see growth taper to between 1.5 per cent and 2.5 per cent in 2009, recovering slightly next year to between 3.5 per cent and 4.5 per cent.

"Capital account pressures are intensifying for many emerging economies, amidst a contraction in cross-border lending," the report said.