Global Economy Not Out Of Woods Yet, Recovery Will Be Slow: IMF

Source : The Business Times, July 9, 2009

THE global recession is not over and recovery is still expected to be slow, the International Monetary Fund warned in the latest update of its World Economic Outlook released last night. The highly cautious tone of the report will be seen as validating market concerns that have re-emerged over whether sentiment has outrun short-term economic recovery prospects.

Sewing it up: The stars in global economic growth will be China and India

'The global economy is beginning to pull out of a recession unprecedented in the post-World War II era, but stabilisation is uneven and the recovery is expected to be sluggish,' the IMF says in its bi-annual update on the world economy. The global growth forecast for 2010 has been revised upwards slightly in the latest update to 2.5 per cent after a forecast contraction of 1.4 per cent this year.

The report makes it clear that the global economy and the international financial system are still on life-support from government and central bank-administered aid, and that 'macro-economic policies need to remain supportive'. But it also urges governments to 'prepare the ground for an orderly unwinding of extraordinary levels of public intervention'.

There has been a massive transfer of risk from the private to the public sector as a result of banking rescue packages and economic stimulus programmes and the fiscal burden this has produced will not be easily or quickly resolved, the IMF says.

In the latest market update of its Global Financial Stability Report (GFSR), also released last night, the IMF reported that 'financial conditions have improved as unprecedented policy intervention has reduced the risk of systemic collapse' but, at the same time, it warned that 'vulnerabilities remain and complacency must be avoided'.

The World Economic Outlook suggests that the US economy would contract by 2.6 per cent this year and expand a modest 0.8 per cent in 2010. Japan, the world's second largest economy after the US, is projected to post a 6 per cent drop in GDP this year (exceeded only by a forecast 6.2 per cent fall in Germany) before returning to 1.7 per cent growth in 2010.

The euro area as a whole will see its economies shrink by 4.8 per cent and then by a further 0.3 per cent next year. Advanced economies as a whole will contract by 3.8 per cent before returning to 0.6 per cent overall growth in 2010.

The stars of the global economy will be China, growing at a projected 7.5 per cent this year and 8.5 per cent in 2010, and India, 5.4 per cent and 6.5 per cent respectively - well ahead of other emerging markets which are projected to see their overall growth rate slump to just 1.5 per cent (from 6 per cent in 2008) and to recover only to 4.7 per cent in 2010.

Despite some positive signs in the global economy, 'financial systems remain impaired, support from public policies will gradually diminish and households in countries that suffered asset price busts will rebuild savings', the report says. The implication is that recovery may slow again as official support fades, and that personal consumption will not return to pre-crisis levels.

The 'downward drag exerted by the financial shock, the sharp fall in global trade and the general increase in uncertainty and collapse of confidence is gradually diminishing'. 'However, supportive forces are still weak. Many housing markets have yet to bottom out, financial markets remain impaired and bank balance sheets still need to be cleaned and institutions restructured. The main policy priority now remains restoring financial sector health.'

Adding to this, the GFSR notes that the global financial sector 'continues to be dependent upon significant public support, resulting in an unparalleled transfer of risk from the private to the public sector'.

Overall conditions in financial markets 'remain tight'. 'Growth in bank credit to the private sector continues to be slow in mature economies, securitisation markets outside of those supported by the public sector remain impaired and lower quality borrowers have little access to capital market funding.'