World GDP to shrink in 2009, first time in 60 years: IMF

The world economy is set to contract for the first time in 60 years, as the deepening
financial crisis would lead to the global GDP shrinking by up to one per cent in 2009, the IMF warned on Thursday.

In its latest assessment of the global economy published on Thursday, the International Monetary Fund said that "more sustained, concerted policy actions (was) needed to revive growth" in the economy across the world, as trade volumes have shrunk rapidly despite large stimulus packages announced by advanced economies and several emerging markets.

"... production and employment data suggest that global activity continues to contract in the first quarter of 2009... Global activity is now projected to contract by half to one
per cent in 2009 on an annual average basis the first such fall in 60 years," IMF said.

The assessment is part of IMF's analysis provided to the Group of Twenty (G-20) industrialized and emerging market economies in their meeting at London. However, the 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.

IMF said that the world GDP would shrink by 0.5-1.0 per cent in 2009, before growing by 1-5-2.5 per cent in 2010. The IMF has forecast a decline of 3.0-3.5 per cent in the  GDP of developed economies in 2009 and a growth of 0.0-0.5 per cent in 2010. The US could shrink by 2.6 per cent, while Japan and Eurozone would witness deeper plunge of 5.8 per cent and 3.2 per cent respectively.

For emerging and developing economies, IMF has forecast 1-5-2.5 per cent growth in 2009, followed by 3.5-4.5 per cent growth in 2010. IMF said that advanced economies would suffer deep recessions in 2009, while major economies in the Group of Seven are expected to experience the sharpest contraction as a group in the post-war period.

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

IMF has stressed the need for countries to implement large fiscal stimulus packages to anchor crisis-related spending in the context of a credible medium-term fiscal framework so that deficits do not get out of hand.

At the G-20 meet, the financial heads from major developed and emerging economies pledged a sustained effort to end the global recession and to cleanse banks of toxic assets. The IMF said that in the fourth quarter of 2008 global GDP contracted by 5 per cent at an annualized rate. The IMF is still working on its projections and will announce numbers for countries around the world on April 22.

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

Emerging Asia is being hurt by its reliance on the manufacturing exports, which in turn has been particularly hurt by collapsing IT exports, it noted. The international agency said that global financial and economic conditions could rebound faster than anticipated if policy measures are credibly strengthened.

Most G-20 advanced and emerging countries, including the US, China, Germany, India, Russia, and Saudi Arabia, are providing large stimulus packages, it added. While the overall stimulus being provided by G-20 countries is sizeable, it falls short of the 2 per cent 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.

The G-20 has asked the IMF to monitor and assess the responses to the crisis by its member governments around the world.