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World stands on the brink of recession: IMF

Led by a devastating financial crisis, the International Monetary Fund warned that the world stands on the brink of a recession which is unlikely to end before 2010.

business Updated: Oct 08, 2008 20:30 IST

The world stands on the brink of a recession, led by a devastating financial crisis that is sending rich nations on a downward spiral unlikely to end before 2010, the International Monetary Fund warned on Wednesday.

In a semi-annual report on the global economy, the IMF slashed its 2008 global growth forecast to 3.9 per cent and its 2009 prediction to three per cent. Growth of under three per cent is considered a global recession.

The US economy is likely to contract between now and early 2009 as the country continues to weather a financial storm that is far from over, the IMF said in its World Economic Outlook.

The world's largest economy will grow by 1.6 per cent this year - buoyed by a fiscal stimulus cheque and exports that bolstered second-quarter figures - but only 0.1 per cent in 2009.

Western Europe is following suit. Italy is to contract by 0.1 per cent in 2008, and recessions will follow in 2009 for Spain and Britain. The euro area is forecast to grow 1.3 per cent in 2008 and only 0.2 per cent in 2009.

Advanced economies as a whole will grow on average by 1.5 per cent in 2008 and only 0.5 per cent in 2009 as financial institutions undergo a painful period of restructuring. Not one of the seven largest world economies will witness growth of more than 1 percent in 2009.

Nearly all the low growth figures represented serious corrections from the IMF's July forecast, which was made before the dire month of September during which a series of banks in the US and Europe faced bankruptcy and government bail-outs.

The 2009 numbers were cut back especially drastically, as the IMF warned that the financial crisis would depress spending and keep credit availability tight well through next year. US growth for 2009 was scaled back 0.7 percentage points and the euro area by one percentage point.

In a bid to stave off that global recession and keep credit flowing through the economy, six of the world's central banks, including the Federal Reserve and the European Central Bank, slashed interest rates on Wednesday, mostly by 50 basis points.

But the financial turmoil has also begun spreading to poorer economies already dealing with surging food and energy prices. Emerging and developing economies will grow by 6.9 per cent in 2008 and 6 per cent in 2009, sharply down from 8 per cent in 2007.

Slower demand from developed nations and increasing turmoil in regional markets has decreased growth and productivity in emerging Asian economies, the IMF said.

A major policy challenge for this extremely diverse region is how to respond to the global financial turbulence and weakening growth outlook, without losing sight of increasing inflation led by food and energy.

In China, decreasing exports meant that economic growth dipped to 10.5 per cent in the first half of this year, from 12 per cent in 2007, according to the report. Growth was expected to fall to 9.7 per cent in 2008 and 9.3 per cent in 2009.

India was likely to see only 7.9 per cent growth this year and 6.9 per cent growth in 2009, compared to 9.3 per cent in 2007. Economies of the Association of Southeast Asian Nations (ASEAN) have also decelerated.

A US recession was to be expected as the financial system works its way out of a crisis that has severely curbed the availability of credit to businesses and consumers.

The IMF also warned that risks to its growth outlook were clearly negative, as the rapidly expanding and increasingly dangerous financial crisis" could last longer and have a far greater impact on credit access then the forecast takes into account.

At the centre of the credit crisis is a US housing market downturn that the IMF called unprecedented since the Great Depression" of the 1930s. The plunge in housing prices, which has sparked a record number of home foreclosures that has decimated the value of banks mortgage-related assets, will not reach bottom until 2009.

But the IMF warned that similar property bubbles were playing out in some European countries and Australia. Britain was one of those most severely impacted.