IMF predicts global recession

07 Nov 2008


Olivier BlanchardThe worldwide outlook for economic growth has weakened severely over the past month, researchers at the International Monetary Fund (IMF) said yesterday. Not only does it predict a contraction in the economies of developed countries, emerging economies can also fall prey to recession, although the IMF refused to use that word.

For years, the IMF has used an informal definition of a recession as global growth at below 3 per cent. That is because it is rare for emerging market economies to record negative growth. In its updated forecast, the IMF said world output would fall to 2.2 per cent growth in 2009, down from 3.7 per cent pegged for 2008. The projection is below the IMF's prior forecast, released just a month ago, which had called for 3.0 per cent growth.

As for the richer nations, the predictions are dire. The economies of the US, Europe and Japan are expected to contract in 2009 as part of the first annual decline by the advanced economies since World War II.

The IMF now expects the US economy to contract by 0.7 per cent next year, compared with its October forecast for 0.1 per cent growth. In countries using the euro currency, the economy will likely shrink by 0.5 per cent in 2009, down from the October forecast of 0.2 per cent growth. It forecast a 1.3-per cent decline for the British economy next year.

The IMF also sees a contraction of 0.2 per cent in Japan's economy in 2009, down from its previous forecast of 0.5 per cent growth. Even China, the world's fastest growing major economy of the last two decades, will experience a slowdown to 8.5 per cent from the earlier projection of 9.3 per cent growth.

The slowdown stems from two primary factors, including "a dramatic fall in confidence by consumers and firms," said Olivier Blanchard, chief economist of the IMF. "After holding up for a long time, they simply have gotten scared and decided to spend less."

The second cause has been the "migration of the financial crisis to emerging markets," as major international banks continue to cut back on debt, Blanchard added. The sharp drop in commodity prices also contributed. Oil, for example, has fallen by more than half since reaching record levels of $147 a barrel in July.

He said while measures to address problems in the financial system have been comprehensive, more flare-ups are likely. In response to the forecast, the IMF called for global action to support financial markets and for fiscal- and monetary-policy actions to limit the downturn.

"We can't be sure there are no landmines left in the field," Blanchard said. There were also growing risks of deflation in advanced economies, he cautioned. "At this stage this is something we should worry about but we think the probability of sustained deflation is for the moment very small.''

However, he did offer hope that ''global fiscal expansion'' may yet help the world tide over the crisis. ''If it comes then the forecast will be on the pessimistic side,'' he proffered.

The IMF warned that conditions could get even worse as financial firms reduce their debt, investors brace for rising corporate defaults, and consumers cut back on spending. It said policy responses could be "reinforced, clarified and better coordinated and thereby foster a more rapid recovery in lending and demand."

"The forceful policy responses in many countries have contained the risks of a systemic financial meltdown," the IMF said. "Nonetheless, there are many reasons to remain concerned about the potential impact on activity of the financial crisis."

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