IMF Survey: Global Economy Contracts, With Slow Recovery Next Year

April 22, 2009

  • World output projected to decline by 1.3 percent in 2009
  • Need for sustained policy response to tackle financial sector, support demand
  • With strong policies, growth could reemerge in 2010
  • Blanchard: “World growth can turn positive by the end of this year, and unemployment can start decreasing by the end of next year” (photo: Eugene Salazar/IMF)

In the most severe recession since World War II, the global economy is projected to shrink by 1.3 percent in 2009, with a slow recovery expected to take hold next year, according to the IMF’s April World Economic Outlook (WEO).

Global Economy Contracts, With Slow Recovery Next Year

Shoe plant in Cu Chi, Vietnam: emerging economies suffering badly from global crisis, especially exporters in east Asia (photo: Steve Raymer/Corbis)

WORLD ECONOMIC OUTLOOK

While the rate of contraction should moderate from the second quarter of 2009 onward, output per capita is projected to decline in countries representing three-quarters of the global economy. Growth is projected to reemerge in 2010, but at 1.9 percent it would be sluggish relative to past recoveries.

IMF Chief Economist Olivier Blanchard told reporters that the world economy was being battered by competing crosscurrents, with the collapse in confidence and demand continuing to pull the economy down and government stimulus measures and natural stabilization mechanisms pulling the economy up.

“This is not the time for complacency, and the need for strong policies, both on the macro and especially on the financial fronts, is as acute as ever. But, with such policies in place, there is light at the end of this long tunnel. World growth can turn positive by the end of this year, and unemployment can start decreasing by the end of next year.”

Shift toward recovery

Although Blanchard said that today “the first current strongly dominates the second,” he could see the balance shifting towards the end of the year, with growth in advanced countries becoming positive again in 2010, and returning to its normal level around the end of 2010.” Unemployment will crest only toward the end of 2010, however, and should decrease after that. Historical evidence presented in the WEO suggests recovery may be slower than in other recessions.

Achieving the projected turnaround will depend on stepping up efforts to heal the financial sector, while continuing to support demand through monetary and fiscal easing. “The immediate imperative is to move boldly with credible plans to deal with the financial crisis that has been at the core of the global recession over the past six months,” the report said. At the same time, macroeconomic policies should be geared to supporting demand to minimize the corrosive feedback from weakening real economic activity on the financial sector.

Blanchard: “World growth can turn positive by the end of this year, and unemployment can start decreasing by the end of next year” (photo: Eugene Salazar/IMF)

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