4-23-09, 9:30 am

Original source: Global Times

WASHINGTON, April 22 (Xinhua) -- The International Monetary Fund on Wednesday warned that the global economy was in 'a severe recession' and the world output is projected to decline 1.3 percent this year, the deepest global recession since the Great Depression in 1930s.

'The global economy is in a severe recession inflicted by a massive financial crisis and acute loss of confidence,' said the IMF in its latest World Economic Outlook report. 'All corners of the globe are being affected.'

EPICENTER OF CRISIS

According to the report, the world economy is projected to decline by 1.3 percent in 2009 as a whole and to recover only gradually in 2010, growing by 1.9 percent.

'Achieving this turnaround will depend on stepping up efforts to heal the financial sector, while continuing to support demand with monetary and fiscal easing,' said the IMF.

The advanced economies experienced an unprecedented 7.5 percent decline in real GDP during the fourth quarter of 2008, and output is estimated to have continued to fall almost as fast during the first quarter of 2009, according to the report.

Although the U.S. economy may have suffered most from intensified financial strains and the continued fall in the housing sector, western Europe and advanced Asia have been hit hard by the collapse in global trade, as well as by rising financial problems of their own and housing corrections in some national markets.

Emerging economies are suffering badly and contracted 4 percent in the fourth quarter in the aggregate.

The United States, at the center of an intensifying global financial storm, will contract by 2.8 percent this year, said the IMF, adding that 'the biggest financial crisis since the Great Depression has pushed the United States into a severe recession.'

Meanwhile, the euro zone economy will shrink by 4.2 percent this year and fall a further 0.4 percent in 2010, the IMF said, criticizing the bloc for weak public policy responses and coordination.

In Japan, the IMF expects 2009 output to fall 6.2 percent, far worse than its January forecast for a 2.6 percent decline.

China is expected to slow to about 6.5 percent this year, half the 13 percent growth rate recorded pre-crisis in 2007 but still a strong performance given the global context, according to the IMF.

UNCERTAIN OUTLOOK

The IMF warned the financial crisis remains acute. 'The financial market stabilization will take longer than previously envisaged, even with strong efforts by policymakers,' it said.

Thus, financial strains in the mature markets are projected to remain heavy until well into 2010, and overall credit to the private sector in the advanced economies is expected to decline in both 2009 and 2010.

Meanwhile, emerging and developing economies are expected to face greatly curtailed access to external financing in both years.

In a semi-annual report Global Financial Stability Report (GFSR), which was released on Monday, the IMF said write-down on U.S.-originated assets to be suffered by all holders will be 2.7 trillion dollars, 'largely as a result of the worsening base-case scenario for economic growth.'

Total expected write-downs on global exposures are estimated at about 4 trillion dollars, of which two-thirds will fall on banks and the remainder on insurance companies, pension funds, hedge funds, and other intermediaries.

In the latest World Economic Outlook report, the IMF warned that the current outlook is exceptionally uncertain, with risks weighed to the downside.

The crisis has hurt international trade, with volume expected to plunge 11 percent this year before eking out 0.6 percent growth in 2010.

Consumer prices in developed countries were under pressure and would fall 0.2 percent in 2009.

'Even once the crisis is over, there will be a difficult transition period, with output growth appreciably below rates seen in the recent past,' said the IMF.

BOLD POLICY

The IMF called for its members to take new bold policy stimulus to jump-start their economies.

'This difficult and uncertain outlook argues for forceful action on both the financial and macroeconomic policy fronts,' said the IMF.

Past episodes of financial crisis have shown that delays in tackling the underlying problem mean an even more protracted economic downturn and even greater costs, both in terms of taxpayer money and economic activity.

'Policymakers must be mindful of the cross-border ramifications of policy choices,' said the IMF. 'Initiatives that support trade and financial partners will help support global demand, with shared benefits.'

In advanced economies, scope for easing monetary policy further should be used aggressively to counter deflation risks.

Although policy rates are already near the zero floor in many countries, whatever policy room remains should be used quickly, according to the IMF.

Emerging economies also need to ease monetary conditions to respond to the deteriorating outlook.

However, in many of those economies, the task of central banks is further complicated by the need to sustain external stability in the face of highly fragile financing flows, the IMF warned.

The 185-member organization also warned against the rising protectionism.

'Greater international cooperation is needed to avoid exacerbating cross-border strains,' said the IMF.

'Coordination and collaboration is particularly important with respect to financial policies to avoid adverse international spillovers from national actions.'

'A slide toward trade and financial protectionism would be hugely damaging to all, a clear warning from the experience of 1930s beggar-thy-neighbor policies,' it warned.