In its bleakest forecast in years, the International Monetary Fund said on Wednesday the world economy was set for a major downturn with the United States and Europe either in or on the brink of recession.
The International Monetary Fund said a still-developing financial upheaval -- the most violent since the 1930s -- would exact a heavy economic toll as markets wrestle with a crisis of confidence and global credit is choked off.
The IMF's assessment was written before a globally coordinated interest- rate cut of half a percentage point on Wednesday by the US Federal Reserve, European Central Bank, Bank of England, Switzerland, Canada and Sweden. China also cut its key rate 27 basis points and its reserve requirements for banks by half a percentage point.
The joint move followed weeks of unprecedented turmoil in global markets that has frozen money markets, even as central banks have pumped billions of dollars into the global financial system. In its report, the IMF warned that credit conditions remain very difficult, restraining global growth prospects. “The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,” the IMF said in its World Economic Outlook.
In hindsight, the IMF said lax economic and regulatory policies probably allowed the global economy to “exceed its speed limit.” At the same time, market flaws, together with policy shortcomings, allowed stresses to build. Now, the global economy is about to pay the price.
The IMF slashed its 2009 forecast for world growth to 3%, which would be the slowest pace in seven years, from a July projection of 3.9%, and warned that a recovery would be unusually slow. It said growth this year would come in at 3.9%, a touch below the 4.1% it projected in July.
CRISIS SPREADS; EMERGING ECONOMIES HIT
The IMF had believed developing economies could largely steer clear of any painful economic spillover from the credit mess stemming from the deep US housing slump. But no longer. In its latest report, the global economic watchdog warned emerging and developing economies are also slowing, in some cases to rates well below trend. At the same time, the combination of soaring food and fuel prices has pushed inflation to levels unseen in a decade, the IMF said, exacting an especially heavy toll in the developing world where families' spending on food is high.
In advanced economies, oil price increases have also been felt, but underlying price pressures appear to be contained, it added. The immediate challenge for policy-makers is to stabilize credit markets, while nursing economies through the global downturn and keeping inflation under control, the fund said. It sees the US economy screeching to halt and warned a recession was increasingly likely with gross domestic product likely to contract in the final quarter of this year and the first quarter of 2009.
For all of next year, it projects US growth of just 0.1%. “The United States has been at the centre of the intensifying global financial storm .. and the economy is now slowing fast,” the fund said.
The near-term course of the US economy, the IMF said, will largely depend on the effectiveness of recent government initiatives to combat the spreading credit crisis. In Europe, the crisis has stalled growth, and interest-rate cuts and decisive government action to restore confidence to prevent a lasting slowdown are needed, the report said. The fund said growth in the euro zone is likely to slow to 1.3% in 2008 and ease further to a scant 0.2% in 2009.
Asian powers China and India will also experience slower growth on weaker exports, but should continue to be supported by solid private consumption, it said. Growth in China is likely to come in at 9.7% this year and 9.3% in 2009 -- compared to 11.9% in 2007, the IMF said. India will grow 7.9% this year and slow to 6.9% in 2009, it said. The Indian economy grew 9.3% last year.
Elsewhere in Asia, domestic demand has also softened as high food and fuel prices have weighed on consumption, while declining profit margins and weakening demand have prompted firms to scale back investment plans. In Africa, the IMF said steady years of growth would be rocked by the financial crisis and higher inflation, although oil producing countries would come off lighter from the economic slowdown. (Reuters)