The International Monetary Fund has said the global economy in 2009 is likely to contract for the first time since the Second World War.
"At this point, we expect global GDP to decline between half a per cent and one per cent in 2009 before recovery gradually gets underway in 2010," a senior IMF official told reporters at its Washington headquarters on a briefing held to release its G-20 Surveillance Note yesterday.
"The major advanced economies, the United States, the Euro Area and Japan, are all suffering severe recessions. The emerging and developing economies are slowing abruptly and many of these are also likely to see falls in activity in 2009," the official said.
However, he added that the forecast is not complete yet.
This downgrade essentially reflects two assessments.
"First, the data for the fourth quarter of 2008 and for early 2009 show an even sharper contraction in output and trade than we had anticipated earlier as negative interactions between real and financial sectors have intensified," he said.
The IMF now estimate that global GDP contracted by an extraordinary 5 per cent at an annualised rate in the fourth quarter of 2008. Moreover, global output continues to decline at a similar pace in the current quarter based on recent data on industrial production, business and household sentiment and trade.
"Second, progress in putting in place policies to deal with the financial crisis has been slow and financial strains are likely to place a continuing drag on activity," the senior IMF official said.
Observing that credit conditions remain severely impaired and uncertainty about bank balance sheets remains high impeding a return of market confidence," the official said.
"We do still see a global recovery getting gradually underway in 2010, but I should emphasise that the turnaround depends on strong policy implementation."
Asserting that there will be no enduring recovery until financial-sector stability is restored, the official said this will require determined and well-coordinated policy implementation by financial authorities.
"The essential elements include credible recognition of losses in problem assets, public support for the recapitalisation of weak but still viable banks and for the effective resolution of insolvent banks," he said.
"It will be important for greater international coordination of financial-sector policies to avoid unintended cross-border spillovers. It will also be important that actions taken be consistent with a long-term vision of a healthy, efficient and dynamic financial system," the senior IMF official said.
The official said it will be important for emerging and developing economies to balance the need to support domestic demand in the face of sharp declines in exports with the risks of accentuating capital outflows and undermining financial stability.
A number of emerging economies in the G-20 have built up policy space through responsible policy management and have been in a position to ease monetary and fiscal policies to provide countercyclical support.
However, many countries have much less room to manoeuvre. "They face difficult external situations where capital flows have reversed and may need to tighten policies to reduce risks of a capital account crisis," he said.
"In this context, it will be important to make sure that large-scale financial support is available as needed from official resources, including from the Fund, to help countries deal with difficult external financial conditions," the official said.
