The International Monetary Fund has slashed its forecast for the world economy next year, predicting outright contraction for the rich economies of North America, Europe, and Japan for the first time since the Second World War.
Taxi driving through Tokyo at night. Photo: GETTY
“Prospects for global growth have deteriorated over the past month. The financial crisis remains virulent. Markets have entered a vicious cycle of asset deleveraging,” said the fund yesterday.
Britain’s economy will suffer and will see the steepest decline in G7 club of leading powers, shrinking 1.3pc as the crunch in the City of London leads to more job losses. Germany will decline by 0.8pc, The US and Spain by 0.7pc.
Sending shivers through stockmarkets everwhere, the Fund cut its world outlook next year to just 2.2pc, down from 3pc just a month ago. This is a global recession under the IMF’s 3pc rule-of-thumb.
“Financial stress is likely to be deeper and more protracted than envisaged in October. Markets are pricing in expectations of much higher corporate default rates, as well as higher losses on securities and loans,” it said.
“Activity is increasingly being held back by slumping confidence. As the financial crisis has become more entrenched, households and firms are increasingly anticipating a prolonged period of poor prospects for jobs and profits. As a result, they are cutting back.”
Olivier Blanchard, the IMF’s chief economist, called on authorities around the world to respond rapidly with combined monetary and fiscal stimulus, saying risk on an inflationary surge had subsided as commodities prices slump.
“There is need for additional macroeconomic stimulus. Room to ease monetary policy should be exploited. The recent moderation of inflation risks has cleared the way for major central banks to cut their policy interest rates,” said the report.
“Monetary policy may not be enough in the face of difficult financial conditions and deleveraging. In some cases room for further easing is limited as policy rates are already close to the zero bound. Broad-based fiscal stimulus is likely to be warranted”.
The IMF said there was an outside risk of “deflationary conditions”, referring to the sort of persistent price falls seen in 1930s. This can be extremely hard for authorities to combat, since real debt burdens continue to grow even with zero interest rates.
No region will be spared the downturn, although China should grow at 8.5pc (down from 9.3pc). This may prove optimistic. A growing number of economists have begun to warn that China faces a hard-landing of its own as over-investment in manufacturing plant for exports comes back to haunt.
The Fund slashed its 2009 oil forecast from $100 a barrel a month ago to $68, and warned that countries with an over-reliance on energy and resources could face a serious squeeze. “The most affected are commodity exporters and countries with acute external financing and liquidity problems. Intense deleveraging could increase the risks of substantial capital flow reversals and disorderly exchange rate depreciations,” it said.
Stephen Pope, strategist at Cantor Fitzgerald, said the IMF had been behind the curve at every stage of this crisis, so this belated recognition that matters are serious may prove a turning point. “The IMF is a lagging indicator,” he said.
By Ambrose Evans-Pritchard
Last Updated: 8:14AM GMT 07 Nov 2008
Source: The Telegraph