The International Monetary Fund on Wednesday sharply revised its 2009 world economic growth projections downward to 0.5 percent, the lowest rate since World War II.
WORLD ECONOMY FACES DEEP RECESSION
"The world economy is facing a deep recession," said the IMF in its updated World Economic Outlook. "Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy."
Accordingly, the world economy is projected to increase by only0.5 percent in 2009, down by 0.75 percentage point from the projections in November.
Advanced economies are suffering the deepest recession since World War II. They are expected to contract 2.0 percent in 2009, a sharp downward revision from the negative 0.3 percent estimate two months ago.
The IMF also expects the U.S. economy, at the center of an intensifying global financial storm, to contract 1.6 percent in 2009, sharply down from its estimate of a 0.7 percent growth issued just two months ago.
Growth in emerging and developing economies is expected to slow sharply from 6.25 percent in 2008 to 3.75 percent in 2009, under "the drag of falling export demand and financing, lower commodity prices, and much tighter external financing constraints."
China's growth rate is expected to ease from near 9.0 percent in 2008 to around 6.7 percent in 2009.
"Stronger economic frameworks in many emerging economies have provided more room for policy support to growth than in the past, helping to cushion the impact of this unprecedented external shock," said the IMF in the update.
Accordingly, although these economies will experience serious slowdowns, their growth is projected to remain at or above rates seen during previous global downturns, it added.
FINANCIAL CRISIS REMAINS UNDER STRESS
The IMF warned the financial crisis remains acute. "The financial market conditions have remained extremely difficult for a longer period than envisaged in the November 2008 WEO Update, despite wide-ranging policy measures to provide additional capital and reduce credit risks," it said.
Since end-October, in advanced economies, spreads in funding markets have only gradually narrowed despite government guarantees, and those in many credit markets remain close to their peaks, it stated.
Meanwhile, in emerging economies, despite some recent moderation, sovereign and corporate spreads are still elevated.
As economic prospects have deteriorated, equity markets in both advanced and emerging economies have made little or no gains, and "currency markets have been volatile," warned the IMF.
It projected the financial markets to remain strained during 2009.
In the advanced economies, market conditions will likely continue to be difficult until forceful policy actions are implemented to restructure the financial sector, resolve the uncertainty about losses, and break the adverse feedback loop with the slowing real economy.
In emerging economies, financing conditions will likely remain acute for some time--especially for corporate sectors that have very high rollover requirements.
"A sustained economic recovery will not be possible until the financial sector's functionality is restored and credit markets are unclogged," it warned.
STRONG EFFORTS URGED TO COPE WITH CRISIS
The IMF called for its members to take new policy stimulus, saying "strong and complementary policy efforts are needed to rekindle activity."
"Policy efforts so far have addressed the immediate threats to financial stability, but they have done little to resolve the uncertainty about the long-term solvency of financial institutions," it said, noting the process of loss recognition and restructuring of bad loans is still incomplete.
In current circumstances, "the timely implementation of fiscal stimulus across a broad range of advanced and emerging economies must provide a key support to world growth," said the international organization.
"Given that the current projections are predicated on strong and coordinated policy actions, any delays will likely worsen growth prospects," it warned.
The IMF urged countries that have policy room to make a firm commitment to do more if the situation deteriorates further.
"Fiscal stimulus packages should rely primarily on temporary measures and be formulated within medium-term fiscal frameworks that ensure that the envisaged buildup in fiscal deficits can be reversed as economies recover and that fiscal sustainability can be attained in the face of demographic pressure," it said.
Meanwhile, countries that have more limited fiscal space should focus their efforts on supporting the financial sector and credit flows, while ensuring that budgets adjust to less favorable external conditions.
"It will be important to avoid cutbacks in foreign aid in response to tightening budget constraints, lest hard-won economic gains in developing countries are lost," said the IMF.
"Moreover, international cooperation will be critical in designing and implementing these policies," it added.
Given the strong efforts, the IMF projected the global economy would experience a gradual recovery in 2010, with growth picking up to 3 percent.
"However, the outlook is highly uncertain, and the timing and pace of the recovery depend critically on strong policy actions," it warned.