Shrinking global economy headed for slow recovery next year: IMF

April 22nd, 2009 - 11:18 pm ICT by IANS  

By Arun Kumar
Washington, April 22 (IANS) With the world in the grip of the most severe recession since World War II, the global economy is projected to shrink by 1.3 percent in 2009, with a slow recovery expected next year, according to the International Monetary Fund (IMF).

While the rate of contraction should moderate from the second quarter of 2009 onward, output per capita is projected to decline in countries representing three-quarters of the global economy, the IMF said in its April World Economic Outlook (WEO).

Growth is projected to re-emerge in 2010, but at 1.9 percent it would be sluggish relative to past recoveries.

IMF chief economist Olivier Blanchard told reporters that the world economy was being battered by competing cross-currents, with the collapse in confidence and demand continuing to pull the economy down and government stimulus measures and natural stabilization mechanisms pulling the economy up.

“This is not the time for complacency, and the need for strong policies, both on the macro and especially on the financial fronts, is as acute as ever. But, with such policies in place, there is light at the end of this long tunnel. World growth can turn positive by the end of this year, and unemployment can start decreasing by the end of next year.”

Although Blanchard said that today “the first current strongly dominates the second”, he could see the balance shifting towards the end of the year, with growth in advanced countries becoming positive again in 2010, and returning to its normal level around the end of 2010.

Unemployment will crest only toward the end of 2010, however, and should decrease after that. Historical evidence presented in the WEO suggests recovery may be slower than in other recessions.

Achieving the projected turnaround will depend on stepping up efforts to heal the financial sector, while continuing to support demand through monetary and fiscal easing.

“The immediate imperative is to move boldly with credible plans to deal with the financial crisis that has been at the core of the global recession over the past six months,” the report said.

At the same time, macroeconomic policies should be geared to supporting demand to minimise the corrosive feedback from weakening real economic activity on the financial sector.

The WEO said that while there have been some encouraging signs of improving sentiment since the G-20 meeting in early April, confidence in financial markets is still low, weighing against the prospects for an early economic recovery.

Overall, the advanced economies are forecast to contract by 3.8 percent in 2009, with the US economy shrinking by 2.8 percent. Emerging and developing economies will seen positive growth of 1.6 percent, bouncing back to 4.0 percent next year.

The WEO, presented ahead of the IMF-World Bank Spring Meetings in Washington, said the advanced economies experienced an unprecedented 7.5 percent decline in real GDP during the fourth quarter of 2008, and output is estimated to have continued to fall almost as fast during the first quarter of 2009.

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