IMF Says 2009 World Growth to be Slowest in 60 Years 

The Washington-based International Monetary Fund has issued a sharp downward revision to its forecast of global growth. Fund economists expect a mere five-tenths of one percent growth this year, the slowest in 60 years.

Just two months ago the IMF said world growth would total nearly 3.5 percent this year.  But given the sudden severity of the global recession, that figure has revised drastically downward. 

"We expect the global economy to come to a virtual standstill in 2009," said IMF chief economist Olivier Blanchard. "There are important differences across countries. In the advanced economies, we basically forecast the sharpest contraction in the post-war period."

But Blanchard says the situation is not much better in the developing world as China's growth projection for 2009 is being cut in half from two years ago to 6.7 percent.  Blanchard says the global economy is caught in what he calls an adverse feedback loop where the financial crisis impacts the real economy.

"The financial crisis has weakened consumer and business confidence, raised uncertainty, and destroyed wealth, leading to much lower consumption and much lower investment," he said.

In addition, Blanchard says the weak condition of banks makes it hard for consumers and businesses to get credit.

The IMF's Jaime Caruana, who will soon leave to become head of the Bank for International Settlements, says potential losses, mainly from bad mortgage loans in the United States, have risen to over $2 trillion.  Caruana says for credit markets to function normally, more taxpayer money must be extended to the banks.

"At least half a trillion dollars is necessary to prevent the capital position [of banks] from deteriorating further," he said.

Chief economist Blanchard is cautiously optimistic that with carefully coordinated doses of fiscal stimulus in the main economies, growth could return relatively quickly.

"With the right policies and a bit of luck a recovery, I think, could come relatively sooner and be stronger than we currently forecast," he said.

The IMF expects the U.S. economy to rebound to nearly two percent growth in 2010.  Blanchard opposes using taxpayer money to bail out the depressed U.S. auto industry, calling it disguised trade protectionism.   

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