Economic Standstill
January 28, 2009
Wealthy nations will experience their worst recession in the post-war period as a financial crisis continues to spread throughout their economies, the International Monetary Fund said as it slashed its global economic forecasts. A contraction of two percent is expected in 2009, even with massive fiscal stimulus packages planned by all rich countries.
A recovery to 1.1 percent is possible in 2010, the IMF said, but only with drastic government intervention to help revive demand and stabilize financial institutions at the heart of the downturn.
Germany to contract 2.5 percent
The United States will contract by 1.6 percent and Germany -- Europe's largest economy -- by 2.5 per cent in 2009. Japan, Asia's biggest economy, will contract 2.6 percent, the IMF predicted.
Growth in emerging and developing countries will also slow dramatically in 2009 to 3.3 percent from 6.3 percent in 2008.
China's economy will slow to 6.7 percent in 2009 from nine percent, India's will drop to 5.1 percent and Brazil's growth will plummet a whopping four percentage points to 1.8 percent in 2009.
The IMF's predictions represented another sharp revision from its last forecast in November, a fact attributed to dramatic collapses in consumer and business confidence, plummeting global trade and demand, frozen credit markets and even greater losses for financial institutions.
"We expect the global economy to come to a virtual standstill in 2009," Olivier Blanchard, the IMF's chief economist, told reporters.
In its November update, the IMF had forecast 2.2 percent global growth for 2009, a contraction of 0.3 percent in advanced economies and 5.1 percent growth in developing countries. World growth below three percent is considered a global recession.
Global trade volumes are also expected to collapse in 2009, contracting 2.8 percent after growth of 4.1 percent the year before. In November, the IMF still predicted a 2.1 percent increase in trade for this year.
Deflation becoming a serious risk
At the same time, the IMF warned that deflation was now becoming a serious risk for some wealthy nations. Consumer prices were expected to rise by only 0.3 percent in industrial nations in 2009 and 0.8 percent in 2010.
The global downturn continues to be driven by the debilitating financial crisis which began with a collapse in the US housing market but has since spread to all corners of the globe.
Financial firms are now projected to lose a total of $2.2 trillion before the crisis is over -- about $500 billion more than banks currently have in their reserves -- and will require more government aid.
The IMF also expects the world's 20 largest economies to spend at least 1.5 percent of their gross domestic product on massive fiscal stimulus packages. The US is currently mulling an $825 billion package worth some five percent of GDP.
Such government spending is crucial to reviving consumer demand, but would only provide a relatively short-term boost to economies: stabilizing the financial system is the key in the long run.
"Restoring financial health is a necessary condition for durable economic recovery," Blanchard said, adding that governments needed to take more "aggressive" measures to stem the collapse of financial firms.
Prescription for recovery
Banks' need for cash has stopped them from lending to each other and to consumers. Developing countries have seen foreign investments in their economies dry up as a result.
Governments, especially the US, must inject more capital into banks to keep them afloat, but should also take the damaged mortgage-related assets off their balance sheets in order to promote a long-term recovery, the IMF said.
The price of commodities like oil, food and metals has also plummeted in the last few months due to falling demand, putting even more pressure on some poorer countries dependent on their exports of natural resources.