MercoPress. South Atlantic News Agency

IMF: support efforts “take time”; fiscal stimulus needed

The International Monetary Fund World Economic Outlook (WEO) says prospects for global growth have deteriorated over the past month and will slow from 5% in 2007 to 3.75% this year and just over 2% in 2009.

"Prospects for global growth have deteriorated over the past month, as financial sector de-leveraging has continued and producer and consumer confidence have fallen" says the WEO released on Thursday. "World output is projected to expand by 2.2% in 2009, down by some 0.75 percentage point of GDP relative to the projections in the October WEO. In advanced economies, output is forecast to contract on a full-year basis in 2009, the first such fall in the postwar period. In emerging economies, growth is projected to slow appreciably but still reach 5% in 2009". The report says many advanced economies will shrink next year, with the United States and Europe hit by tightening financial conditions and falling confidence. China's growth is projected to slow to just below 10% this year, and expand 8.5% in 2009. The slowing growth is also expected to hurt developing nations by cutting demand for the commodities that are important to many of those economies. The IMF says it will take time for efforts to support the global economy to work, but they predict that a recovery will begin late in 2009. IMF Chief Economist Olivier Blanchard told a news conference: "We think that global fiscal expansion is very much needed at this point. If it comes, then the forecast we have will be on the pessimistic side." Finance ministers will meet November 8-9 in Sao Paolo, Brazil, ahead of a summit of world leaders in Washington on November 15 to discuss issues related to the crisis. The IMF, which will also attend, has been asked to take the lead by its policy-setting body, the International Monetary and Financial Committee, in line with its mandate, in drawing the necessary policy lessons from the current crisis and recommending effective actions to restore confidence and stability. These ideas could feed into the summit discussion. The White House has invited to the summit members of the G-20, a forum of rich and emerging nations that was convened in 1999 after an earlier international crisis. Its members are Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United States, and the European Union. Blanchard said the IMF would "advocate at the G-20 a global fiscal expansion as one of the measures that has to be taken fairly soon." Jorg Decressin, of the IMF's Research Department, told the news conference that the United States, Germany, and China were among the countries that have room for additional fiscal stimulus. Regarding inflation the IMF forecast said that a combination of stabilizing commodity prices and increasing economic slack will help to contain pressures. In the advanced economies, headline inflation should decline to below 1.5% percent by the end of 2009. In emerging economies, inflation is also expected to moderate, albeit more gradually. However, in a number of these countries, inflation risks are still manifest, as higher commodity prices and continued pressure on local supply conditions have affected wage demands and inflation expectations. Finally the reports states that comprehensive policy actions are being implemented to address the root causes of financial stress and to support demand, "but it will take time to reap their full benefits. The initiatives include programs to purchase distressed assets, use of public funds to recapitalize banks and provide comprehensive guarantees, and a coordinated reduction in policy rates by major central banks". The IMF forecast said that a stronger macroeconomic policy response to the crisis could help limit the damage. "There is a clear need for additional macroeconomic policy stimulus relative to what has been announced thus far, to support growth and provide a context to restore health to financial sectors. Room to ease monetary policy should be exploited, especially now that inflation concerns have moderated," it stated. But the forecast said that monetary policy easing may not be enough. "Fiscal stimulus can be effective if it is well targeted, supported by accommodative monetary policy, and implemented in countries that have fiscal space".