IMF warns of deepening recession in rich countries

Other News Materials 10 November 2008 01:23 (UTC +04:00)

The world's developed economies are headed for the first full-year contraction since World War II and governments should ramp up spending to support the global economy, the International Monetary Fund said on Thursday, according to Reuters.

The IMF said it now expects 2009 global economic growth of 2.2 percent, down 0.8 percentage point from the forecast it gave in October. While government efforts to cushion the blow were helping, more steps were warranted, the fund said.

"Market conditions are starting to respond to these policy actions, but even with their rapid implementation, financial stress is likely to be deeper and more protracted than envisaged (in October)," the IMF said in a statement.

"There is a clear need for additional macroeconomic policy stimulus relative to what has been announced thus far," the IMF added. "Room to ease monetary policy should be exploited."

The Bank of England made a shock 1- percentage point cut in interest rates on Thursday while both the European Central Bank and the Swiss National Bank reduced rates by one-half point.

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

The IMF also sees a contraction of 0.2 percent in Japan's economy in 2009, down from its previous forecast of 0.5 percent growth.

In emerging and developing economies, the IMF now expects 2009 growth of 5.1 percent, down a full point from its October forecast, in part because of falling commodity prices. While that has helped ease the inflation burden on rich countries, it is hurting commodity exporters.

The IMF cut its 2009 growth forecast for China's economy to 8.5 percent, down from an October projection of 9.3 percent.

The IMF lowered its 2009 baseline oil price projection to $68 per barrel from $100, and noted that prices had also fallen for metals and food.

IMF chief economist Olivier Blanchard said the Fund's downward growth revisions for most economies was based on a sharper-than-expected fall in demand in advanced countries and worsening credit conditions in emerging market economies.

He said while measures to address problems in the financial system have been comprehensive, more flare-ups are likely.

"We can't be sure there are no landmines left in the field," he 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," Blanchard added.