'Financial crisis bringing global economy to a standstill'

By Time of article published Jan 28, 2009

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Washington - The International Monetary Fund slashed its economic outlook Wednesday, predicting the severe financial crisis would brake global growth to the slowest pace in six decades.

"World growth is projected to fall to 0.5 percent in 2009, its lowest rate since World War II," the IMF said in a sharp 1.75-point downward revision of November forecasts.

"The world economy is facing a deep recession," it warned.

The advanced economies were expected to contract by 2.0 percent, their first annual contraction in the postwar period and far more than the negative 0.3 percent the IMF estimated less than three months ago.

"Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy," the 185-nation institution said, warning its projections were made in a "highly uncertain outlook."

"The timing and pace of the recovery depend critically on strong policy actions," it said. "A sustained economic recovery will not be possible until the financial sector's functionality is restored and credit markets are unclogged."

The IMF held out hope for a gradual recovery in the global economy in 2010, with growth of 3.0 percent spurred by "continued efforts to ease credit strains as well as expansionary fiscal and monetary policies."

But for now, the United States, the epicentre of the financial crisis, would endure a 1.6 percent contraction in 2009, the IMF said, slashing its prior estimate of 0.9 percent.

The world's biggest economy, nonetheless, would weather the financial storm better than most other major advanced economies.

Japan's economy would shrink by 2.6 percent in 2009 instead of the mild prior estimate of 0.2 percent. The world's second-largest economy would be in recession for the second consecutive year, following a 0.3 percent contraction in 2008.

The 27-member eurozone economy would hit a wall, suffering a 2.0 percent contraction after growing 1.0 percent in 2008. The previous 2009 estimate was for a 0.5 percent contraction.

Germany, Europe's biggest economy, would shrink by 2.5 percent this year after a 1.3-percent expansion in 2008, according to IMF figures published six days ago.

France would undergo a 1.9 percent contraction, instead of 0.8 percent growth in 2008. And Italy was seen contracting for three years in a row through 2010, with a peak of 2.1 percent this year.

Britain, outside the eurozone, would suffer the most, with gross domestic product (GDP) activity contracting 2.8 percent, after 0.7 percent growth last year.

Of the major advanced economies, Canada would be the least affected, hit with a 1.2-percent contraction in 2009 after 0.6 percent growth.

Developing countries were forecast to expand by 3.3 percent in 2009, about half the 6.3-percent expansion of last year.

China would remain the world's fastest-growing economy, putting in a relatively blistering 6.7-percent pace, down from 9.0 percent in 2008.

India's economic growth would slow to 5.1 percent after 7.3 percent.

The IMF cautioned that "the uncertainty surrounding the outlook is unusually large."

"Downside risks continue to dominate, as the scale and scope of the current financial crisis have taken the global economy into uncharted waters," it said.

"The main risk is that unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth."

In a separate report on global financial stability, the IMF raised its estimate of potential losses in US-originated asset writedowns to 2.2 trillion dollars, up from 1.4 trillion dollars.

"More aggressive actions by both policymakers and market participants are needed to ensure that the necessary deleveraging process is less disorderly," it said, underscoring that international cooperation was key to re-establishing financial stability.

It prescribed a broad three-pronged approach - including liquidity provision, capital injections, and disposal of problem assets - "that should be implemented fully and quickly so as to encourage balance sheet cleansing." - AFP

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