Global downturn deeper that feared, says IMF

April 22, 2009

Global downturn deeper that feared, says IMF

In a grim assessment of global prospects, the IMF once again drastically cut its forecasts for key economies across the world

The savage slump in the world’s leading economies is set to be even deeper than previously feared, with recovery next year now unlikely to materialise, the International Monetary Fund warned today.

In a grim assessment of global prospects, the IMF once again drastically cut its forecasts for key economies across the world. It blamed the continuing blight from severe financial stresses for a still worsening global outlook.

For Britain, the fund inflicted a double blow on Alistair Darling minutes after the Chancellor unveiled his Budget. It predicted that the UK economy will now shrink by 4.1 per cent this year — markedly worse than Mr Darling’s own new projection for a 3.5 per cent decline, and said that the recession would drag on into 2010, with a further drop of 0.4 per cent in GDP next year. The Chancellor has predicted a recovery with 2010 growth of 1.25 per cent.

The fund’s hard-hitting report warned that, despite a blizzard of far-reaching official efforts to bail-out banks and stem financial turmoil, governments had failed to halt a vicious downward spiral as intense financial strains and deteriorating economic conditions feed off each other.

Calling for still more “forceful action” by governments on both sides of the Atlantic, the IMF said that halting the slump in the global economy and restoring growth now depended critically on governments “stepping up efforts to heal the financial sector”.

But a day after the fund predicted that cumulative losses for banks in the US, Europe and Japan from the credit crisis will hit $4 trillion, it also warned that, even if economic recovery is secured, it is set to be anaemic and “sluggish relative to past recoveries”.

The latest IMF forecasts, in its twice-yearly World Economic Outlook, project that what it says will be by far the worst world recession since the Second World War will mean a worldwide plunge in economic output (GDP) of 1.3 per cent. That compares with its January forecast which foresaw meagre world growth of just 0.5 per cent, still weak enough to be classed as a global recession.

In the leading economies of the West, the IMF now expects GDP to plummet this year by a vicious 3.8 per cent, down from the 2 per cent drop it expected in January.

It also now expects no revival in 2010, with the advanced industrial economies as a whole set to stagnate with zero growth. That contrasts with the recovery to 1.1 per cent growth that the fund was able to envisage only four months ago.

The bleak new assessment saw forecasts cut for every Western economy this year. The US economy, at the epicentre of the global financial firestorm, is forecast to shrink by 2.8 per cent this year and then to stagnate in 2010. The IMF has abandoned its hopes of a resurgence of American growth to 1.6 per cent next year, and cut its US forecast for this year by a further 1.2 percentage points.

In the eurozone, the report said that the plight of Europe’s big economies would also worsen, with the 16-nation bloc as a whole suffering a 4.2 per cent collapse in GDP this year, and set to shrink by another 0.4 per cent in 2010.

Germany is tipped to be worst hit with a GDP plunge of 5.6 per cent this year, and a further 1 per cent next year. Only France is predicted to see some imminent relief from the gloom, with as 3 per cent decline in 2009 forecast to be followed by modest 0.4 per cent growth after the new year.

The IMF said there were dangers that even its grim new assessment could be too rosy a view, if what it repeatedly called the “corrosive” downward spiral of financial and credit stresses aggravating economic woes was not arrested. “A key concern is that policies may be insufficient to arrest the negative feedback,” it said.

The fund attacked failures by governments to tackle the banking and credit crisis effectively enough. “Announcements have too often been short on detail and have failed to convince markets; cross-border coordination of initiatives has been lacking, resulting in undesirable spill-overs; and progress in alleviating uncertainty related to distressed [toxic] assets has been very limited.”

It renewed its warning a day before that an angry public backlash against banks, bankers and the financial industries could prevent governments from taking the decisive and extensive action needed to stem the threat.

Even once growth is eventually restored to the world’s key economies, the IMF added that the long-term damage from the recession and financial turmoil meant that “there will be a difficult transition period, with output growth appreciably below rates seen in the recent past”.

In a rare glimmer of hope, it conceded, however that: “Recent data provide some tentative indications that the rate of contraction [in the main economies] may now be starting to moderate.”

http://business.timesonline.co.uk/tol/business/article6147495.ece