Nov 7, 2008
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IMF warns of deepening recession in rich countries

Nov 7, 2008

By Lesley Wroughton

WASHINGTON (Reuters) - The world's developed economies are headed for the first full-year contraction since World War II and governments should ramp up spending to support the global economy, the International Monetary Fund said on Thursday.

The IMF said it now expects 2009 global economic growth of 2.2 percent, down 0.8 percentage point from the forecast it gave in October. While government efforts to cushion the blow were helping, more steps were warranted, the fund said.

"Market conditions are starting to respond to these policy actions, but even with their rapid implementation, financial stress is likely to be deeper and more protracted than envisaged (in October)," the IMF said in a statement.

"There is a clear need for additional macroeconomic policy stimulus relative to what has been announced thus far," the IMF added. "Room to ease monetary policy should be exploited."

The Bank of England made a shock 1- percentage point cut in interest rates on Thursday while both the European Central Bank and the Swiss National Bank reduced rates by one-half point.

The IMF now expects the U.S. economy to contract by 0.7 percent next year, compared with its October forecast for 0.1 percent growth. In countries using the euro currency, the economy will likely shrink by 0.5 percent in 2009, down from the October forecast of 0.2 percent growth. It forecast a 1.3 percent decline for the British economy next year.

The IMF also sees a contraction of 0.2 percent in Japan's economy in 2009, down from its previous forecast of 0.5 percent growth.

In emerging and developing economies, the IMF now expects 2009 growth of 5.1 percent, down a full point from its October forecast, in part because of falling commodity prices. While that has helped ease the inflation burden on rich countries, it is hurting commodity exporters.

The IMF cut its 2009 growth forecast for China's economy to 8.5 percent, down from an October projection of 9.3 percent.

The IMF lowered its 2009 baseline oil price projection to $68 per barrel from $100, and noted that prices had also fallen for metals and food.

IMF chief economist Olivier Blanchard said the Fund's downward growth revisions for most economies was based on a sharper-than-expected fall in demand in advanced countries and worsening credit conditions in emerging market economies.

He said while measures to address problems in the financial system have been comprehensive, more flare-ups are likely.

"We can't be sure there are no landmines left in the field," he said. There were also growing risks of deflation in advanced economies, he cautioned.

"At this stage this is something we should worry about but we think the probability of sustained deflation is for the moment very small," Blanchard added.


Blanchard said in some countries there was little room left to cut interest rates further and where possible, governments should turn to fiscal policy for help.

"When you get to zero you're done in terms of using interest rates," Blanchard told a news conference.

"We are not quite there yet but as we get closer clearly the room is smaller and that is why the instrument you have left is fiscal policy and that is why we are strongly advocating fiscal expansion," he added.

Even though fiscal stimulus by one country would spill over into other countries, stimulus would be more effective if done in a coordinated fashion, Blanchard said.

"We think that global fiscal expansion is very much needed at this point," he said. "If it comes then the forecast will be on the pessimistic side."

The Fund warned that conditions could get even worse as financial firms reduce their debt, investors brace for rising corporate defaults, and consumers cut back on spending.

"The forceful policy responses in many countries have contained the risks of a systemic financial meltdown," the IMF said. "Nonetheless, there are many reasons to remain concerned about the potential impact on activity of the financial crisis."

The IMF said policy responses could be "reinforced, clarified and better coordinated and thereby foster a more rapid recovery in lending and demand."

(Additional reporting by Alister Bull and Emily Kaiser; Editing by Andrea Ricci)

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