Washington: The global economy is slowly starting to pull out of its deepest recession since World War II but a recovery will be sluggish and policies need to remain supportive, the International Monetary Fund said on Wednesday.
In an update of its World Economic Outlook, the IMF said the global economy is likely to contract 1.4% this year, a touch steeper than the 1.3% decline it projected in April.
However, it now sees world growth strengthening to 2.5% in 2010, compared to an April forecast of 1.9%.
IMF chief economist Olivier Blanchard said forces dampening economic activity were easing in intensity but those pushing it up were still weak despite heavy government spending and central bank lending.
“This leads us to predict that while the world economy is still in recession, the recovery is coming but it is likely to be a weak recovery,” Blanchard told a news conference.
He emphasized that confidence in the financial sector would not return until toxic debts were removed from banks’ balance sheets and frail institutions recapitalized.
The IMF said conditions had improved more than expected as governments have pumped huge amounts of money into their economies and financial institutions, and warned against withdrawing fiscal and monetary support prematurely.
“Although exiting now would be premature, I think it’s fundamental that we devise credible plans that map where we’re going in the medium-term and how we’re going to get there,” said Jose Vinals, director of the IMF’s Monetary and Capital Markets Department.
Vinals said addressing high public debt levels should be part of exit strategy plans, warning that sovereign debt markets may be destabilized if the burden on public sector balance sheets begins to be perceived as unsustainable.
A summit of Group of Eight leaders from industrial countries on Wednesday committed to withdrawing stimulus spending only when a recovery looked secure.
“All were of the view that the crisis is a long way from being over. With luck, we have reached the bottom,” German Chancellor Angela Merkel told reporters at the G8 in the Italian town of L’Aquila.
BELOW-TREND GROWTH AHEAD
The IMF said while the world’s advanced economies are expected to recover modestly next year, growth will remain below potential until later in 2010, suggesting unemployment will rise further.
It said the U.S. economy will contract 2.6 percent this year, slightly less than it thought in April, with growth resuming in 2010, albeit at a mere 0.8 percent.
The IMF said the euro-area economy would likely shrink 4.8 percent in 2009, 0.6 percentage point more than it had forecast in April. Next year, the IMF said the euro-area would contract 0.3 percent.
Japan’s economy is expected to contract by 6 percent this year, with growth resuming slightly to around 1.7 percent next year.
Emerging and developing countries are likely to regain growth momentum during the second half of 2009, it said.
Blanchard said Asia cannot decouple from the global economy despite signs the region is emerging from the worldwide slump faster than many economists had expected.
Strong growth, particularly out of China and India had rekindled hopes the region could decouple from slower-growing advanced economies and recover on its own.
“After a tough first quarter, Asia, in particular, is now set for a stronger performance than we anticpated earlier,” Blanchard said. The IMF revised up forecasts for Asia by nearly 1 percent for both 2009 and 2010.
Overall, the IMF said policies should remain supportive until growth resumes and deflationary risks dissipate. Where there is room, central banks should explore cutting interest rates further and signal that they intend to keep them low until a durable recovery is under way, it said.