IMF: world economy entering major downturn

09/10/2008

The IMF predicted a world economic downturn in a grim report Wednesday, but "the risk of a Great Depression is nearly nil," its chief economist added.

(WSJ, The Times, The Guardian - 09/10/08; IMF, Reuters, AP, AFP, FT, BBC, VOA, Dnevnik - 08/10/08)

Trading at the Bucharest Stock Exchange was suspended on Wednesday (October 8th) after more than a 10% loss caused by the global financial crisis. [Gabriel Petrescu]

The current financial crisis and still-high energy and commodity prices will drive down economic growth worldwide, pushing many advanced economies into recession, the IMF predicted in a report Wednesday (October 8th).

"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 185-member international financial institution said in its latest World Economic Outlook (WEO).

Revising its July projections for 4.1% global economic growth in 2008, the IMF now expects the world economy to expand at a pace of 3.9% this year and then at 3% in 2009, the lowest level since 2002. Global economic growth of 3% or less is considered by some economists equivalent to a global recession, the report noted.

Even if the US and European authorities succeed in stabilising financial conditions and in thwarting further shocks, global growth rates are not expected to return to normal until 2010, the IMF added.

"In advanced countries, the crisis is now being driven by a downward spiral of loss of confidence and trust," IMF Chief Economist Olivier Blanchard said. The effects of this are spreading to consumers and businesses, he warned.

The US economy is expected to expand 1.6% this year and a mere 0.1% in 2009.

The worsening financial conditions in Western Europe will have a negative impact on growth rates there as well, according to the WEO.

The IMF expects economic growth in the 15-nation euro zone to drop sharply to 1.3% in 2008 and then to just 0.2% next year, with two of those countries likely to witness contractions in either one or both years -- Italy and Spain.

While the Southeast European economies are still enjoying "good times", they must take action to rein in rising external and internal imbalances, the Fund said.

"Specifically, growth in public expenditures needs to be contained by keeping public wage increases in line with productivity growth and reducing the size of government," the WEO read. "Maintaining high prudential standards … is critical in order to prevent weakening credit standards," it added.