Washington: The International Monetary Fund (IMF) said on Wednesday that the world economy has fallen into a severe recession, cutting its forecast for global growth and calling for forceful action to spur a recovery.
In its latest World Economic Outlook, IMF said the global economy would likely contract 1.3% this year in the deepest post-World War II recession by far. Growth is set to re-emerge to around 1.9% next year, a pace more sluggish than average recoveries because of lingering strains in the financial sector, it added.
Just three months ago, IMF had projected global growth of 0.5% but two months later warned it would fall into deeply negative territory. The Washington-based institution said its revisions to the global outlook stem from assumptions that financial markets will take longer than previously expected to stabilize.
IMF warned that the turnaround depends on efforts by governments to nurse the global financial sector back to health by cleaning up banks’ balance sheets, and on additional fiscal and monetary policies in advanced economies.
“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,” IMF said.
It said the US remains at the epicentre of the crisis and said it is critical US authorities address mounting toxic debt and uncertainty about banks’ solvency. It pared its forecast for the US to a 2.8% contraction this year and no growth in 2010 as the ravages of a credit squeeze, falling house and equity prices and high levels of uncertainty play out.
Meanwhile, the euro zone economy will shrink by 4.2% this year and fall a further 0.4% in 2010, IMF said, criticizing the bloc for weak public policy responses and coordination.
It warned that the recession would be “particularly severe” in Ireland and “quite severe” in the UK.
IMF said the Commonwealth of Independent States were worst affected of all regions, facing a dramatic economic collapse as the credit crisis, slumping demand and energy prices deliver a series of painful blows.
In Asia, harder hit by a drop in global trade than by the financial crisis, IMF said Japan’s recession would be far deeper than previously thought, while China’s economy will grow at a much slower pace.
The crisis also has not spared West Asia, where the large drop in oil prices is hitting the region and reversal of capital flows are also taking a toll. The same is true for countries in Latin America that are being hit by commodity price drops and where the biggest threat is a protracted financial deleveraging in advanced economies that will lead to a prolonged halt in capital inflows, IMF said.