Despite major stimulus packages announced by advanced economies and several emerging markets, trade volumes have shrunk rapidly, while production and employment data suggest that global activity continues to contract in the first quarter of 2009, the IMF said in a new assessment of the global economy.
Global activity is now projected to contract by 0.5 to 1 percent in 2009 on an annual average basis—the first such fall in 60 years, the IMF said in an analysis provided to the Group of Twenty (G-20) industrialized and emerging market economies. Global growth is still forecast to stage a modest recovery next year, conditional on comprehensive policy steps to stabilize financial conditions, sizeable fiscal support, a gradual improvement in credit conditions, a bottoming of the U.S. housing market, and the cushioning effect from sharply lower oil and other major commodity prices.
“Turning around global growth will depend critically on more concerted policy actions to stabilize financial conditions as well as sustained strong policy support to bolster demand,” the IMF said. The analysis, prepared for the G-20 meeting in the United Kingdom March 13–14, was made public by the IMF on March 19. The IMF is stressing the need for countries implementing large fiscal stimulus packages to anchor crisis-related spending in the context of a credible medium-term fiscal framework so that deficits do not get out of hand.
Finance chiefs from the biggest developed and emerging economies pledged at the G-20 session a “sustained effort” to end the global recession and to cleanse banks of toxic assets. They were preparing for a summit of G-20 leaders in London on April 2
Leading economies in the Group of Seven are expected to experience the sharpest contraction for these countries as a group in the post-war period by a significant margin. The IMF said that in the fourth quarter of 2008 global GDP contracted by 5% at an annualized rate. The IMF is still working on its projections and will announce numbers for countries around the world on April 22.
The mutually reinforcing negative feedback loop between the stalling real economy and the still corrosive financial sector has intensified, and prospects for recovery before mid-2010 are receding. “Delays in implementing comprehensive policies to stabilize financial conditions would result in a further intensification of the negative feedback loops between the real economy and the financial system, leading to an even deeper and prolonged recession,” the IMF warned.
In the United States, the contraction in activity in 2009 is expected to push up the output gap to levels not seen since the early 1980s. Assuming that financial market conditions improve relatively rapidly in the second half of 2009, based on the implementation of a detailed and convincing plan for rehabilitating the financial sector, as well as continued policy support to bolster domestic demand, growth is expected to turn positive in the course of the third quarter of 2010.
In the Euro area, the decline in activity in 2009 reflects a sharp collapse in external demand, the impact of housing market corrections in some member states (which began later than in the United States), and an intensification of financing constraints. The impact of falling external demand has been larger and policy stimulus more moderate than in the United States, though automatic stabilizers—such as unemployment pay and welfare payments—are somewhat larger in the euro area.
In Japan, the sharp fall in output reflects plunging net exports and business investment and faltering private consumption. The financial sector—though not at the epicenter of the crisis—is also suffering ill effects, weighing upon growth prospects.
In emerging and developing economies, as well as in low-income countries, growth will continue to be impeded by financing constraints, lower commodity prices, weak external demand, and associated spillovers to domestic demand. Activity is expected to expand only weakly in 2009—before recovering gradually in 2010.