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IMF Predicts Slow Global Recovery from Financial Crisis

IMF Chief Economist Olivier Blanchard says the world is absorbing an enormous shock from the financial crisis and recession that began in the United States in 2007. Blanchard presents an economic outlook sharply reduced from the predictions of only three months ago.

The IMF says the world economy will shrink by 1.3 percent this year, its worst performance in more than 60 years. It says recovery is expected to begin only at the end of the year and that growth will recover to only 1.9 percent in 2010. Blanchard says there has been unprecedented contraction in recent months.

"The collapse of demand has led to sharp cutbacks in production and a dramatic decline in exports. Global GDP went down by an unprecedented six percent, at an annual rate, in the last quarter of 2008. And, as far as we can tell, most likely declined almost as fast in the first quarter of 2009," he said.

The severity of the global downturn has surprised IMF forecasters who only three months ago predicted slight growth, not a downturn, for 2009. Blanchard expects the recovery to be sluggish with unemployment in the major economies peaking only at the end of 2010.

Blanchard and his colleagues believe the fragility of the banking system poses a downside risk to their already gloomy forecast.

"Banks are still very much in the process of retrenching and tightening lending standards. Many securities markets are still poorly functioning. And the longer this goes on the longer and the deeper will be the recession. And the longer and deeper the recession the worse will be the health of the financial system," he said.

The IMF calculates that worldwide losses associated with bad loans, mainly in the U.S. and European housing sectors, could reach $4 trillion by the end of next year. World trade is likely to plunge 11 percent this year, after expanding by three percent in 2008.

The IMF says the U.S. economy is likely to contract by nearly three percent this year and register zero growth in 2010. Growth in the euro-zone (16 economies using the euro currency) is projected to be even more sluggish, negative four percent this year. Japan's economy is predicted to contract by six percent.

China's growth has slowed to 6.5 percent and India's to 4.5 percent. Russia, suffering from last year's sudden collapse in energy prices, is predicted to shrink six percent. Africa, late in being hit by the crisis, is expanding at a two-percent annual rate.