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World economy in severe recession

The International Monetary Fund slashed growth forecasts for every major country and urged governments to take forceful action to ensure the world economy's recovery from a severe recession.

In its latest World Economic Outlook, the IMF said the global economy would likely contract 1.3% this year in the deepest post-World War Two recession by far.

Growth is set to re-emerge at a sluggish 1.9% next year but the pick-up depends on aggressive measures to repair a poorly functioning financial system.

“The longer this goes on, the longer and the deeper will be the recession,” IMF chief economist Olivier Blanchard told a news conference.

Just three months ago, the IMF had projected global growth of 0.5%, although last month it warned of a deep recession.

The Washington-based institution said it revised its forecasts downward because financial markets appear likely to take longer to stabilize than it had thought earlier.

“A key concern is that policies may be insufficient to arrest the negative feedback between deteriorating financial conditions and weakening economies in the face of limited public support for policy actions,” the IMF said.

The IMF said on Tuesday that banks and other financial institutions around the world faced losses which could amount to $4.1 trillion. It said banks would likely need to raise $875 billion in fresh capital.

In offering new economic projections, the IMF said government measures to battle recession should be sustained, if not increased, in 2010, warning that premature withdrawal of stimulus could set back a recovery.

It said interest rates in major advanced economies are likely to be lowered to or remain near zero, and said authorities should move quickly to cut interest rates where there was room for further easing.

Blanchard said emerging markets were dealing with a sharp drop in capital flows and a collapse in global trade. While, growth is expected to pick up in emerging nations, including China and India, a recovery to previous healthy levels will depend on a pick-up in advanced economies.

The IMF said the United States remains at the epicenter of the crisis, and it said it now expected the US economy to contract 2.8% this year.

It said while there were signs the US recession might be easing, a recovery was unlikely to take hold until next year, which would leave 2010 gross domestic product flat.

“There has been some improvement in business confidence, some signs of bottoming out in the housing market, but these are early days and we should not expect a return to growth any time soon,” IMF economist Charles Collyns said.

IMF economist Jorg Decressin said, however, a recovery in the United States was likely to occur before a pick-up in the euro area, where fiscal and monetary stimulus kicked in later.

The IMF forecast the euro zone economy will shrink by 4.2% this year and fall a further 0.4% in 2010 and it criticized the currency bloc for a weak policy response.

Among euro area countries, Ireland will suffer the sharpest contraction. Its economy is likely to shrink by 8% this year and by 3% next year, the IMF said.

The IMF said it was especially important for European Union countries to coordinate financial policy as bank loan books deteriorate due to a heavy exposure to a slumping emerging Europe.

In Asia, where countries are being harder hit by a drop in global trade than by troubles in the financial sector, the IMF said Japan's recession would be far deeper than previously thought, while China's economy will grow at a much slower pace. (Reuters)