Fri, 10th October 2008

IMF Predicts Major Global Slowdown Amid Financial Crisis

The world economy is decelerating quickly buffeted by an extraordinary financial shock and by still-high energy and commodity prices and many advanced economies are close to or moving into recession, the IMF says in its latest World Economic Outlook (WEO).

The October 2008 report, which was released two days prior to the IMF-World Bank Annual Meetings in Washington, said that growth in emerging economies is also weakening after years of strong growth, though it will still drive global growth. Speaking at the WEO press conference, IMF Chief Economist Olivier Blanchard emphasised the importance of implementing joint financial and macroeconomic policies at this point "to stem the negative momentum on multiple fronts." On the financial side, "this implies the design of comprehensive programs to deal with systemic problems," while on the macroeconomic side, "this implies the use of monetary and fiscal policies to support growth and break negative feedback loops between the financial and real sectors," he said. "With the right macro and financial policies—and these policies are available—we can ride the storm, and expect a recovery to start in the course of 2009," he added. He also welcomed the October 8 announcement by the U.S. Federal Reserve, the European Central Bank, and four other central banks to lower interest rates by a half percentage point. "It is a step in the right direction," he said. Very gradual recovery The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s, according to the WEO, which now expects world growth to slow to 3.0 percent in 2009—0.9 percentage point lower than forecast in the July 2008 WEO Update.

Following sluggish growth through the remainder of 2008 and early 2009, the anticipated recovery later in 2009 will be exceptionally gradual by past standards. This is because financial conditions are expected to remain very difficult, even assuming that actions by the U.S. and European authorities succeed in stabilizing financial conditions and in avoiding further systemic events. "In advanced countries, the crisis is now being driven by a downward spiral of loss of confidence and trust," Blanchard said. The effects are spreading to consumers and firms, he warned, which had so far weathered the recent price hikes in oil and commodities well but were now experiencing sharply slowing demand. However, despite the emerging economies' cooling momentum, they are still expected to provide a source of resilience, benefiting from strong productivity growth and improved policy frameworks. But the longer the financial crisis lasts, the more the emerging economies' growth is likely to be affected.