TradePost Archives > April 23, 2009 > this article

IMF sees 1.3% drop in global output

April 22, 2009
Financial Times

The global economy will contract sharply this year and recover only sluggishly in 2010, the International Monetary Fund said on Wednesday as it called on governments to sustain or even increase fiscal stimulus next year.

The IMF said that world output would contract by 1.3 per cent this year and grow by just 1.9 per cent the year after in what it described as a “substantial downward revision” of its January forecasts, when it said the global economy would grow by 0.5 per cent this year and spring back to 3 per cent growth in 2010.

Its assessment provides a sobering counterpoint to excitement over “green shoots” of recovery seen in some recent economic data.

The new forecasts came as Japan reported its first quarterly trade deficit in nearly three decades for the year to March, highlighting the global downturn’s affect on the world’s second-largest economy, which remains heavily reliant on exports.

Meanwhile, Tim Geithner, US Treasury secretary, warned against prematurely scaling back efforts to support the global economy. Speaking in Washington DC, Mr Geithner noted “encouraging signs” in the world economy and financial markets. But he said “we still face significant risk and challenge. For this reason it is critically important that we continue to act to strengthen the basis for recovery”.

The IMF, in its World Economic Outlook, said: “By any measure, this downturn represents by far the deepest global recession since the Great Depression.” It added: “Even once the crisis is over, there will be a difficult transition period, with output growth appreciably below rates seen in the recent past.”

The fund blamed the worsening prospects on the intensifying “vicious circle” between the ailing financial sector and the shrinking real economy. Efforts by governments to shore up their economies were “failing to arrest corrosive feedback”, it said.

Overall credit to the private sector in advanced economies will decline in 2009 and 2010 as banks continue to reel in lending, it said. Any global recovery will depend on more decisive efforts to shore up financial institutions, it added.

“While governments have acted to provide substantial stimulus in 2009, it is now apparent that the effort will need to be at least sustained, if not increased, in 2010, and countries with fiscal room should stand ready to introduce new stimulus measures,” the report said. As well as fiscal easing, the IMF said the central banks of developed economies should continue to ease monetary policy where possible.

Olivier Blanchard, the IMF’s chief economist, said: “there is light at the end of this tunnel,” but added that the state of the financial system would determine “when the balance will tip”.