Mumbai: It’s official. The International Monetary Fund (IMF) said on Wednesday that the world economy is almost at a standstill.
The global multilateral lender warned that global economic growth this year would be a mere 0.5%, the worst in more than six decades. IMF had in October predicted that the world economy would expand 2.2% in 2009.
India, too, is likely to feel the heat. IMF has cut its estimate of Indian economic growth in 2009 from 6.3% to 5.1%. Growth would bounce back to 6.5% in 2010, though it would be far less than the 9%-plus growth clocked in recent years. China is expected to grow by 6.7% in 2009 and 8% in 2010. The two Asian countries will continue to be the fastest growing large economies in the world. The Prime Minister’s Economic Advisory Council had said last week that the Indian economy would grow between 7-7.5% in 2009-10. Most private sector economists are more pessimistic. IMF makes its forecasts for the calendar year while most other forecasts are for the fiscal year.
Tightening purse strings? IMF’s Strauss-Kahn says that with countries already queuing for help, the Fund may struggle to meet all claims. Laszlo Balogh / Reuters
“Despite wide ranging policy actions, financial strains remain acute, pulling down the real economy,” IMF said. “A sustained economic recovery will not be possible until the financial sector’s functionality is restored and credit markets are unclogged.” It urged governments to work together to revive financial markets and economic activity.
The world’s central bank said emerging market economies would be the only source of growth, expanding 3.3% in 2009 and 5% next year, but those forecasts were below projections made less than three months ago.
The rich economies are in deeper trouble, with the US and the euro area expected to contract 1.6% as they face their deepest recession since the end of World War II.
Also See Dim Prospects (Graphic)
IMF said financial markets will continue to be under stress—and that their troubles will pull down growth in what it described as “a pernicious feedback loop”, with the recession adding to the bad loans and balance sheet woes of global banks, which would worsen the financial crisis and then the recession itself. The Indian banking sector is on a firmer footing than its global peers.
“The continuation of the financial crisis, as policies failed to dispel uncertainty, has caused asset values to fall sharply across advanced and emerging economies, decreasing household wealth and thereby putting downward pressure on consumer demand. In addition, the associated high level of uncertainty has prompted households and businesses to postpone expenditures, reducing demand for consumer and capital goods. At the same time, widespread disruptions in credit are constraining household spending and curtailing production and trade,” IMF said.
The one silver lining right now is that the sharp downturn in the world economy and the fall in commodity prices has led to inflation pressures subsiding. Consumer prices will grow by a modest 0.3% in the advanced economies and by 5.8% in the emerging economies—a far cry from the inflation scare in the middle of 2008. That could help consumer confidence. “The strong rise in consumers’ readiness to buy is mainly due to us having a very low inflation rate at the moment,” said Rolf Buerkl, senior research consultant at Gfk, a German market research group. But the struggle to raise business funding has helped drive confidence among the leaders of the world’s top companies to a new low, according to a poll of more than 1,100 chief executives that set a grim backdrop for the annual meeting of the world’s business and political elite in Davos.
Earlier, IMF chief Dominique Strauss-Kahn said the Fund would struggle if it had to meet all potential claims on its resources. “Several states are already queuing at our doors,” he told German newspaper Die Zeit. “At the moment, we have enough money. But if we actually have to help them, the lion’s share of our resources will be consumed in six-eight months.” IMF is the lender of the last resort to countries that find it difficult to honour their international financial committments.
Graphics by Ahmed Raza Khan / Mint
David Evans is with Reuters.