IMF Gives Recession Forecast

Source : The Straits Times, Nov 7, 2008

WASHINGTON - THE International Monetary Fund on Thursday forecast advanced economies would contract next year for the first time since World War II and called for government spending to battle the global financial crisis.

'Our forecasts are based on current and currently announced policies. It is likely that policies will be more expansionary than we assume,' IMF chief economist Olivier Blanchard said. -- PHOTO: ASSOCIATED PRESS

In sharp downward revisions to its last economic projections made less than a month ago, the IMF said the advanced economies were now seen shrinking by 0.3 per cent in 2009, instead of the prior estimate of 0.5 per cent growth.

It lowered its global economic growth forecast by 0.8 point to 2.2 per cent.

'Prospects for global growth have deteriorated over the past month, as financial sector deleveraging has continued and producer and consumer confidence have fallen,' the IMF said.

'In advanced economies, output is forecast to contract on a full-year basis in 2009, the first such fall in the post-war period,' the 185-nation financial institution said in an update of its October World Economic Outlook (WEO) report.

The IMF said the downturn in advanced economies would be 'broadly comparable in magnitude' to recessions in 1975 and 1982, but that 'a recovery is projected to begin late in 2009'.

Next year almost all the advanced economies would contract: the United States (0.7 per cent), Japan (0.2 per cent) the euro zone (0.5 per cent) and Britain (1.3 per cent). Only Canada would resist the downturn, with 0.3 per cent growth.

'Our forecasts are based on current and currently announced policies. It is likely that policies will be more expansionary than we assume,' IMF chief economist Olivier Blanchard said at a news conference. 'We'll advocate at the G20 a global fiscal expansion.'

IMF managing director Dominique Strauss-Kahn is to attend a finance chiefs meeting of the Group of 20 rich and emerging countries this weekend in Sao Paulo, ahead of a G20 summit convened by US President George W. Bush on Nov 15 in Washington.

'There is a clear need for additional macroeconomic policy stimulus relative to what has been announced thus far, to support growth and provide a context to restore health to financial sectors,' the IMF said.

Asked which countries would have the most scope and the most need for fiscal action, another IMF economist, Mr Joerg Decressin, said the United States, 'Europe and especially Germany', and China.

The IMF made more modest downward revisions to its 2008 forecasts, projecting world growth at 3.7 per cent, down 0.2 point, and advanced economies at 1.4 per cent, down 0.1 point.

The IMF said it now sees far more difficult conditions worldwide since its Oct 8 WEO report as a result of a global credit crunch that has hit banks and financial markets.

'Markets have entered a vicious cycle of asset deleveraging, price declines, and investor redemptions,' the IMF said. 'Beyond the direct impact of the financial crisis, activity is increasingly being held back by slumping confidence.'

'As the financial crisis has become more entrenched, households and firms are increasingly anticipating a prolonged period of poor prospects for jobs and profits. As a result, they are cutting back on consumption, notably of durables, and investment.'

The IMF said the United States, the epicentre of a financial crisis that erupted in August 2007 after the collapse of the subprime mortgage market, would still show positive growth for 2008, but at a tepid rate of 1.4 per cent, with the second-half contraction offsetting growth in the first six months of the year.

Emerging and developing countries remained the growth engines for the global economy, but at a slower rate of 5.1 per cent in 2009.

The IMF slashed its 2009 forecast for developing countries in Asia by 0.6 percentage points to 7.1 per cent.

'Countries in East Asia - including China - generally have suffered smaller markdowns' than other economic powers, it said, forecasting China's growth at 8.5 per cent in 2009.

'Their financial situations are typically more robust, they have benefited from improved terms of trade from falling commodity prices, and they have already initiated a shift toward macroeconomic policy easing.' -- AFP