Auto storage tower in Wolfsburg, Germany: advanced economies will suffer deep recessions in 2009, IMF assessment says (photo: John Macdougall/AFP)
WORLD FINANCIAL CRISIS
Global activity is now projected to contract by ½ to 1 percent in 2009 on an annual average basis—the first such fall in 60 years, the IMF said in an analysis provided to the Group of Twenty (G-20) industrialized and emerging market economies. Global growth is still forecast to stage a modest recovery next year, conditional on comprehensive policy steps to stabilize financial conditions, sizeable fiscal support, a gradual improvement in credit conditions, a bottoming of the U.S. housing market, and the cushioning effect from sharply lower oil and other major commodity prices.
“Turning around global growth will depend critically on more concerted policy actions to stabilize financial conditions as well as sustained strong policy support to bolster demand,” the IMF said. The analysis, prepared for the G-20 meeting in the United Kingdom March 13–14, was made public by the IMF on March 19. The IMF is stressing the need for countries implementing large fiscal stimulus packages to anchor crisis-related spending in the context of a credible medium-term fiscal framework so that deficits do not get out of hand.
Finance chiefs from the biggest developed and emerging economies pledged at the G-20 session a “sustained effort” to end the global recession and to cleanse banks of toxic assets. They were preparing for a summit of G-20 leaders in London on April 2
Deep recessions
Advanced economies will suffer deep recessions in 2009, the assessment said. Leading economies in the Group of Seven are expected to experience the sharpest contraction for these countries as a group in the post-war period by a significant margin (see table). The IMF said that in the fourth quarter of 2008 global GDP contracted by 5 percent at an annualized rate. The IMF is still working on its projections and will announce numbers for countries around the world on April 22.
The mutually reinforcing negative feedback loop between the stalling real economy and the still corrosive financial sector has intensified, and prospects for recovery before mid-2010 are receding. “Delays in implementing comprehensive policies to stabilize financial conditions would result in a further intensification of the negative feedback loops between the real economy and the financial system, leading to an even deeper and prolonged recession,” the IMF warned.
• In the United States, the contraction in activity in 2009 is expected to push up the output gap to levels not seen since the early 1980s. Assuming that financial market conditions improve relatively rapidly in the second half of 2009, based on the implementation of a detailed and convincing plan for rehabilitating the financial sector, as well as continued policy support to bolster domestic demand, growth is expected to turn positive in the course of the third quarter of 2010.
• In the euro area, the decline in activity in 2009 reflects a sharp collapse in external demand, the impact of housing market corrections in some member states (which began later than in the United States), and an intensification of financing constraints. The impact of falling external demand has been larger and policy stimulus more moderate than in the United States, though automatic stabilizers—such as unemployment pay and welfare payments—are somewhat larger in the euro area.
• In Japan, the sharp fall in output reflects plunging net exports and business investment and faltering private consumption. The financial sector—though not at the epicenter of the crisis—is also suffering ill effects, weighing upon growth prospects.
Spillovers to emerging economies
In emerging and developing economies, as well as in low-income countries, growth will continue to be impeded by financing constraints, lower commodity prices, weak external demand, and associated spillovers to domestic demand. Activity is expected to expand only weakly in 2009—before recovering gradually in 2010. Some economies will suffer serious setbacks, the IMF said [see related story].
• Central and Eastern Europe and the Commonwealth of Independent States are the most adversely affected. The global financial disruptions have severely affected central and eastern Europe in particular, given the region’s large current account deficits. Several countries are facing a sharp contraction in capital inflows. Countries suffering the most include the Baltics, Hungary, Croatia, Romania, and Bulgaria.
• In Latin America, tight financial conditions and weaker external demand are a drag on growth in the region, with growth in Brazil decelerating sharply and Mexico projected to enter a recession.
• Emerging Asia is being hurt through its reliance on manufacturing exports. The region’s manufacturing activity has been particularly hurt by collapsing information technology exports. Growth in China is also slowing, albeit from a high rate (13 percent in 2007), and domestic demand is being supported by strong policy stimulus.
• In Africa and the Middle East, growth is also projected to slow, but more modestly than in other regions. In Africa, growth is expected to slow down particularly in commodity exporting countries, and several countries are experiencing reduced demand for their exports, lower remittances, and foreign direct investment, while aid flows are under threat. In the Middle East, the effects of the financial crisis have been more limited. Despite the sharp drop in oil prices, government spending is largely being sustained to cushion the toll on economic activity.
Possible rebound
The IMF said that global financial and economic conditions could rebound faster than anticipated if policy measures are credibly strengthened. It characterized the current crisis is partly a “crisis of confidence.” While exceptional uncertainty far exceeds that seen during typical downturns, the right policies could help turn around confidence, providing a lift to spending and global growth. The key is dealing credibly with problem assets and concerns about banking solvency.
Restoring confidence is key to resolving the crisis, and this calls for tackling problems in the financial sector head on. Policymakers must resolve urgently balance sheet uncertainty by dealing aggressively with distressed assets and recapitalizing viable institutions, the analysis said.
Since financial market strains are global, greater international policy cooperation is crucial for restoring market trust. Monetary policy should be eased further by reducing policy rates where possible, and support credit creation more directly.
Tracking the response
The G-20 has asked the IMF to monitor and assess the responses to the crisis by its member governments around the world. Assessments can be found here.
The IMF said that most G-20 advanced and emerging countries—including the United States, China, Germany, India, Russia, and Saudi Arabia—are providing large stimulus packages. While the overall stimulus being provided by G-20 countries is sizeable, it falls short of the 2 percent of GDP recommended by the IMF, particularly for 2010. However, given the rapid slowdown in global activity, stimulus will need to be sustained during 2010, the IMF recommended.
Comments on this article should be sent to imfsurvey@imf.org
