WASHINGTON - The global economy likely will contract next year for the first time in decades as the credit crunch bites, leaving the financial sector on life support, an international banking group said on Thursday.
Charles Dallara, the managing director of the IIF said that the weakening of economic activity and intense financial market strains are feeding on each other and are reinforced by the global synchronization of the slowdown The Institute of International Finance (IIF), a Washington-based association representing more than 375 of the world's major banks and financial institutions, projected the world economy would shrink 0.4 per cent in 2009, after a 2.0 per cent gain this year.
'It should be emphasized that an overall contraction in the global economy is a truly weak outcome, and the first time this has happened in the post-1960 period,' the IIF said in its monthly Global Economic Monitor report.
Charles Dallara, the managing director of the IIF, called it 'the most severe, globally synchronized recession in modern economic history.' He said the economy was mired in a negative feedback loop.
'The weakening of economic activity and intense financial market strains are feeding on each other and are reinforced by the global synchronization of the slowdown,' the IIF head said.
Philip Suttle, the IIF macroeconomic analysis director, said that data as far back as the early 1950s do not show a contraction in the world economy.
The IIF said that the mature economies already gripped in recession - the United States, the 15-nation eurozone and Japan - would contract a hefty 1.4 per cent amid the worst financial crisis since the Great Depression.
Those advanced economies were seen growing a mere 0.9 per cent this year as the global credit crunch that erupted in August 2007 flared in mid-September with the collapse of Wall Street investment bank Lehman Brothers.
The US economy, the world's largest and the epicentre of the financial tsunami, would shrink 1.3 per cent in 2009 after growth of 1.2 per cent this year, according to the IIF projections.
The eurozone would contract more sharply, by 1.5 per cent from 0.9 per cent growth, and Japan would shrink 1.2 per cent after zero growth.
The sharpest markdown was for the emerging economies, including powerhouses China, India, Brazil and Russia.
Those engines of global growth had resisted the impact of the credit crunch gripping the advanced economies until the mid-September financial firestorm, the IIF said.
The IIF forecasted economic growth in emerging markets would brake to 3.1 per cent in 2009 after a 5.9 per cent gain this year.
'Emerging Asian growth has slowed sharply, but should hold up better than in other regions,' it said.
China's growth would drop to 6.5 per cent in 2009 from 9.3 per cent this year and 11.9 per cent in 2007, while India's deceleration would be less steep, to 5.0 per cent from 6.2 per cent.
The IIF said 'particularly weak growth' was forecast for central, eastern and southern Europe, with economic output of just 0.3 per cent likely for 2009 after 4.5 per cent in 2008.
Since the start of 2007, the reported losses at financial institutions has topped US$1 trillion, the IIF said. Institutions have raised about US$930 billion since mid-2007, with more than one third coming from the public sector.
Hung Tran, head of the IIF's capital markets and emerging market policy department, warned that those losses would increase amid the economic slowdown.
'The weakening economy will increase credit losses, continuing to put pressure on bank capital. This underscores the point that capital injection alone will not be sufficient to strengthen the banking system until the economy and financial markets stabilise,' Mr Tran said.
Mr Dallara recommended measures including the purchase of troubled assets and relief of credit bottlenecks, and said an increasing number of financial institutions were making progress in reforming operations to address the exposed problems.
But he said actions by central banks to cut rates aggressively and take other steps to get credit flowing will help foster a recovery.
'We trust that coherent fiscal and monetary policies throughout Europe and in Japan will play their full parts in restoring conditions conducive to the resumption of sustained global growth,' he said. -- AFP
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