Washington: The world economy will slow sharply this year and next, with the United States likely sliding into recession reflecting mounting damage from the most dangerous financial jolt in more than a half-century.
The International Monetary Fund, in a World Economic Outlook released on Wednesday, slashed growth projections for the global economy and predicted the United States the epicenter of the financial meltdown will continue to lose traction.
“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,” the IMF said in its report.
The IMF now projects that the global economy, which grew by a hardy 5% last year, will lose considerable speed, slowing to 3.9% this year. It is forecast to weaken even more to just 3 % next year, marking the worst showing since 2002. In the past, the IMF has called global growth of 3% or less the equivalent to a global recession.
The IMF’s projection was made before the Federal Reserve and other major central banks from around the world slashed interest rates Wednesday in an attempt to prevent a financial crisis from becoming a global economic meltdown.
The Fed reduced its key rate from 2% to 1.5%, In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 percent, while the European Central Bank sliced its rate to 3.75%.
Also cutting rates: The central banks of China, Canada, Sweden, and Switzerland. The Bank of Japan said it strongly supported the actions.
The IMF’s chief economist, Olivier Blanchard, called the orchestrated rate cuts “clearly a step in the right direction.” However, he warned that it is also clear that “there will be tough economic times ahead.” Lower rates aren’t a cure-all, he said. “By itself, it cannot solve the problem, but it is part of the solution.”
Asked about the risk of the global economy getting stuck in a prolonged downturn, Blanchard responded: “I believe that the risk of a Great Depression is nearly nil.’
The financial crisis, which erupted in the United States in August 2007 and has quickly spread around the globe, entered a tumultuous new phase last month, badly shaking confidence in global financial institutions and markets, the IMF said. It has triggered a cascading series of bankruptcies, forced mergers and radical government interventions such as the United States’ unprecedented $700 billion financial bailout to stem the fallout.
The new projections come before a gathering of the world’s top economic powers on Friday and the weekend meetings of the IMF and the World Bank. The jarring financial crisis is likely to figure prominently in those discussions.
In the United States, the economy, which grew by 2% last year, is projected to slow to 1.6% this year. Growth would screech to a virtual halt in 2009, barely budging at just 0.1%. That would mark the worst showing since 1991, when the country was pulling out of a recession.
The IMF and many private economists believe the US economy will probably contract in the final three months of this year and the first three months of next year, meeting a classic definition of a recession. The economy’s last recession was in 2001.
The government’s bailout package is aimed at thawing lending by buying bad mortgage-related debt from troubled financial institutions. The idea is that the banks’ books would then be cleaner, putting them in a better position to lend and get the economy moving.
The IMF said this effort should help to stabilize markets but even so “the process of balance-sheet repair will be long and arduous.” Credit availability is likely to remain constrained throughout 2009, the IMF said.
Fed Chairman Ben Bernanke warned in a speech on Tuesday that the economy’s outlook for this year has darkened and the pain could last for some time. His remarks were seen as foreshadowing Wednesday’s rate cut.
Looking at other countries, Germany’s growth will slow to 1.8% this year, down from 2.5% last year. France’s growth will weaken to just 0.8%, compared with 2.2% in 2007. Britain’s economy will see growth taper to 1%, down from 3% last year. Canada’s growth will tail off to 0.7% this year, from 2.7% last year.
In Japan, growth will cool to just 0.7%, from 2.1% last year.
Global powerhouses China and India will see growth clock in this year at a robust 9.7% and 7.9%, respectively. Even if those projections prove correct, they would still mark downgrades from their blistering performances last year. Russia’s economy should grow by a brisk 7% this year, down from 8.1% last year.
Brazil’s booming growth is expected to cool a bit to 5.2% this year, from 5.4% last year. Mexico’s growth will slow more sharply to 2.1%, from 3.2%.