IMF: World Economy In `Major Downturn’ Amid Fincl Shock

Oct.08, 2008 in Market Outlook

By Tom Barkley
WASHINGTON (Dow Jones)–The outlook for the global economy has darkened
considerably, with the ever-spreading financial crisis expected to push several
advanced economies into recession, the International Monetary Fund said
Wednesday.

“The world economy is now entering a major downturn in the face of the most
dangerous shock in mature financial markets since the 1930s,” the IMF said in its
latest World Economic Outlook.

Just a few months after upgrading its global forecasts, the IMF is now ratcheting
down its expectations for the economy this year and into 2009.

The world economy is now expected to expand at a 3.9% pace in 2008, down from the
last estimate of 4.1% in July. The 2009 forecast was slashed from 3.9% to 3%,
which would be the weakest level since 2002 and around the threshold of what the
IMF considers a global recession.

While the fund still anticipates a recovery to begin late next year, it warned
there are “considerable downside risks” to that scenario, which assumes that U.S.
and European governments will succeed in their efforts to stabilize markets.

“Global activity is being buffeted by an extraordinary financial shock and by
still-high energy and other commodity prices,” it said. “Many advanced economies
are close to or moving into recession, while growth in emerging economies is also
weakening.”

The IMF reiterated its call for comprehensive and internationally coordinated
responses “to avoid creating adverse, cross-border incentives.”

The report was completed before a wave of coordinated rate cuts by the U.S.
Federal Reserve, European Central Bank, the Bank of England and other major
central banks earlier Wednesday. But the IMF suggested in the report that the
Fed, ECB and Bank of England should consider easing.

The outlook for the U.S., which lies at the “center of the intensifying global
financial storm,” has actually improved for this year after fiscal stimulus
boosted first-half growth. The 2008 forecast edged up to 1.6% from 1.3% in July.
However, the U.S. economy is expected to contract in the fourth quarter of 2008
and early 2009, prompting the fund to downgrade next year’s growth estimate to
0.1% from 0.8%.

A U.S. recovery is expected to begin in the second half of next year, the IMF
said, as housing prices bottom out and the recently passed financial rescue
package helps stabilize markets.

The dollar is still seen as valued “broadly in line with medium-term
fundamentals,” according to the report.

Meanwhile, the IMF expects a “a significant slowdown in activity across western
Europe followed by a very gradual recovery beginning in the second half of 2009.”

The 2008 forecast for euro area growth was cut to 1.3% from 1.7% in July, and to
0.2% from 1.2% in 2009. Italy’s economy is expected to contract this year, and it
will be joined by Spain in 2009, the IMF said.

The U.K. economy is also expected to go from 1.0% growth in 2008 to a 0.1%
contraction next year.

Risks remain to the downside for euro area growth, the fund said, citing the
potential for “accelerated deleveraging in the financial sector” and a sharp
rebound in the euro. The single currency remains “on the strong side of
medium-term fundamentals, despite some recent weakening,” the report said.

Elsewhere, the 2008 forecast for Japan was cut to 0.7% from 1.5% in July, with
the 2009 estimate lowered to 0.5% from 1.5%. Canada’s 2008 estimate was cut to
0.7% from 1.0%, and its 2009 forecast fell to 1.2% from 1.9%.

Advanced economies as a whole can also consider fiscal stimulus measures that are
timely and targeted, the IMF said, with a focus on stabilizing the financial and
housing sectors as needed.

Developing countries face a more diverse set of policy choices, having to balance
growth and inflation risks, it said.

Emerging and developing economies as a whole are still expected to expand at a
solid 6.9% clip this year, though the IMF trimmed its 2009 forecast to 6.1% from
6.7%.

A growing number of developing countries are feeling the effects of the global
slowdown and should halt monetary tightening, while rates may have further to
rise in countries still facing high food and fuel prices. Fiscal policy can also
play a supporting role, the fund said.

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