Reaffirming that the world is in its deepest recession since the Second World War, the International Monetary Fund on Wednesday slashed growth forecasts for every major country and urged governments to take forceful action to ensure economic recovery.
In its latest World Economic Outlook, the IMF said the global economy was likely to contract 1.3 per cent this year. Growth is set to re-emerge at a sluggish 1.9 per cent next year, but the pick-up depends on aggressive measures to repair a poorly functioning financial system.
"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.
On India, it said that the Reserve Bank of India's policy rates were still too high. "Policy rates remain high in real terms in India and further rate cuts would help bolster credit growth," the IMF study said.
It said 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.
The Washington-based institution said it revised its forecasts downward because financial markets appear likely to take longer to stabilise than it had thought earlier. "The longer this goes on, the longer and the deeper will be the recession," IMF chief economist Olivier Blanchard told a news conference in New York.
"Even with determined policy actions, and anticipating a moderation in the rate of contraction from the second quarter onward, global activity is now projected to decline 1.3 per cent in 2009, a substantial downward revision from the January WEO Update," the IMF said report said.
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 measures could set back a recovery.
It said interest rates in major advanced economies are likely to be lowered to or remain near zero, adding that 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.
US the epicentre
The IMF said the United States remains at the epicentre of the crisis, and it now expected the U.S. economy to contract 2.8 percent this year. While there were signs that the US recession might be easing, a recovery was unlikely to take hold until next year, which would leave 2010 gross domestic product flat, it said.
"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.
At the same time, Jorg Decressin, another IMF economist, said 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 that the euro zone economy will shrink by 4.2 per cent this year and fall a further 0.4 per cent in 2010, and criticized the currency bloc for a weak policy response. 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, it said.
Among euro area countries, Ireland will suffer the sharpest contraction. Its economy is likely to shrink by 8 per cent this year and by 3 per cent next year, the IMF said.
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 would grow at a much slower pace.
While there have been some encouraging signs of improvement since the G-20 summit in London early this month, the report said confidence in financial markets is still low, weighing against the prospects of an early economic recovery.
An important side effect of the financial crisis, the report said, has been a flight to safety and return of home bias, which have had an impact on the world's major currencies. Since September 2008, the US dollar, euro, and yen have all strengthened in real effective terms, it said.