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World economy set to contract, upturn next year: IMF

By Arun Kumar, IANS,

Washington : Despite major stimulus packages announced by advanced economies and several emerging markets, including India, the world economy is set to contract for the first time in 60 years, the International Monetary Fund (IMF) said Thursday.

Trade volumes have shrunk rapidly, while production and employment data suggesting that global activity continues to contract in the first quarter of 2009, the IMF said in a new assessment of the global economy.

Global activity is now projected to contract by 0.5 to 1 percent in 2009 on an annual average basis – the first such fall in 60 years, the IMF said in an analysis provided to the Group of Twenty (G-20) industrialised and emerging market economies ahead of their April 2 summit in London.

The IMF said that most G-20 advanced and emerging countries – including the United States, China, Germany, India, Russia, and Saudi Arabia – are providing large stimulus packages.

While the overall stimulus being provided by G-20 countries is sizeable, it falls short of the 2 percent of GDP recommended by the IMF, particularly for 2010. However, given the rapid slowdown in global activity, stimulus will need to be sustained during 2010, the IMF recommended.

Global growth is still forecast to stage a modest recovery next year, conditional on comprehensive policy steps to stabilize financial conditions, sizeable fiscal support, a gradual improvement in credit conditions, a bottoming of the US housing market and the cushioning effect from sharply lower oil and other major commodity prices.

“Turning around global growth will depend critically on more concerted policy actions to stabilise financial conditions as well as sustained strong policy support to bolster demand,” the IMF said.

Advanced economies will suffer deep recessions in 2009, the assessment said. Leading economies in the Group of Seven are expected to experience the sharpest contraction for these countries as a group in the post-war period by a significant margin.

The IMF said that in the fourth quarter of 2008 global GDP contracted by 5 percent at an annualised rate. The IMF is still working on its projections and will announce numbers for countries around the world on April 22.

The mutually reinforcing negative feedback loop between the stalling real economy and the still corrosive financial sector has intensified, and prospects for recovery before mid-2010 are receding.

In emerging and developing economies, as well as in low-income countries, growth will continue to be impeded by financing constraints, lower commodity prices, weak external demand, and associated spillovers to domestic demand.

Activity is expected to expand only weakly in 2009 – before recovering gradually in 2010. Some economies will suffer serious setbacks, the IMF said.