IMF sees major global economic downturn

Crisis puts policy makers 'between a rock and a hard place'

The world economy has entered a "major downturn" with significant risks of worsening, the International Monetary Fund said Wednesday in its annual World Economic Outlook.

"After years of strong growth, the world economy is decelerating quickly," the report said. "Global activity is being buffeted by an extraordinary financial shock and by still-high energy and other commodity prices."

The financial shock has put monetary-policy makers "between a rock and a hard place," the IMF said, needing to work on two fronts: stabilizing the financial sector and using monetary and fiscal policies to support growth.

The coordinated rate cuts announced Wednesday by the major central banks, including the Federal Reserve and the European Central Bank, was "clearly a step in the right direction," said Olivier Blanchard, director of research for the IMF.

The IMF report was written in the past few weeks, after the crisis entered a "tumultuous new phase" in September.

The forecast for global economic growth next year has been marked down to 3% in the latest forecast, with "the major advanced economies already in or near a recession," the fund said. "The pickup is likely to be unusually gradual, held back by the continuing financial market deleveraging."

Inflation should recede quickly, the IMF forecasters said, provided crude-oil prices do not revisit this summer's highs.

The forecasters acknowledged "considerable downside risks" to their predictions, pointing to the possibility that financial stress could remain very high and that credit constraints could intensify.
The forecast assumes authorities take decisive and successful action to arrest the decline in financial markets, Blanchard said. Public funds will be needed to support financial stabilization, he said, including help in recapitalizing the banks.

Looking ahead, the fund said the major immediate challenge for policy makers is to "stabilize global financial markets while nursing economies through a global downturn and keeping inflation under control."

In the longer run, financial systems must be rebuilt. Policy makers will also have to reduce "procyclical tendencies" in the global economy and strengthen "supply-demand responses" in commodity markets.

The IMF forecast has been significantly reduced since July's report. Global growth in 2009 is now seen at 3%, rather than 3.9%. The advanced economies are expected to grow 0.5%, rather than 1.4%. The emerging markets are expected to grow 6.1%, rather than 6.7%.
The United States economy is projected to grow 0.1%, rather than the 0.8% projected three months ago. The euro-zone economy is expected to grow 0.2%, rather than 1.2%. Japan is expected to grow 0.5%, not 1.5%.

Emerging economies should fare better. China's growth-rate forecast was marked down to 9.3% from 9.8%, and India's to 6.9% from 8%.

Global trade is expected to slow significantly from 7.2% growth in 2007 to 4.9% in 2008 and 4.1% in 2009.

With commodity prices projected to fall in 2009, inflation should moderate to about 2% in the advanced economies, the IMF said.