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Global Economic Outlook Worsens Despite Signs of US Recovery Later This Year

Forecasters say the world economy is in the midst of its deepest downturn in 60 years with global growth projected to be negative for this year.

Two months ago the International Monetary Fund said the world economy would grow by a meager one half of one percent this year.

But former IMF chief economist Michael Mussa says global conditions have worsened since then and that growth will be negative eight tenths of one percent in 2009. Mussa, a fellow at Washington's Peterson Institute for Intentional Economics, says the world economy is in the midst of its first significant downturn since World War II. He predicts output declines of two percent in the United States, five percent in Japan and 2.5 percent in the euro area.

But Mussa says that unprecedented monetary and fiscal stimulus in the United States will turn the American economy around within the next few months. He sees positive signs in the 30 percent drop in home prices during the past two years, which is making housing more affordable for American families.

"In contrast, it took Japan 12 years to grind down its real estate prices to reasonable levels," he said. "That adjustment [here] is happening very rapidly. It's painful, but it is necessary."

Mussa says past recessions have seen a sharp downturn followed by a sharp upturn, a so-called V-shaped recovery. And he predicts U.S. economic growth of 3.6 percent next year.

"We are getting an enormous amount of policy stimulus," he said. "Certainly, on the monetary side in the United States, it is beyond anything that has previously been done."

The Federal Reserve - the nation's central bank - has brought short-term interest rates close to zero percent and flooded the financial system with money to stimulate economic activity.

But Mussa's colleague at the Peterson Institute, Simon Johnson, who was also a chief economist at the IMF, remains unconvinced. Johnson says the damage to the economy has been so severe, with consumers and businesses struggling to pay off debt, that the recovery will be anemic and slow - a so-called L-shaped recovery. He predicts little if any growth next year.

"We have done a lot. Governments have done a lot," he said. "Policies have changed in many areas. But the question is: 'Is it a lot in terms of the scale of the problem?" To my mind, it is not enough."

Johnson says that far more fiscal stimulus is needed, particularly in Europe.

But some major developing economies are holding up relatively well. China is expected to register 7.5 percent economic growth this year and India could see five percent growth.