Thursday, April 23, 2009

IMF on the world economy

The IMF's latest World Economic Outlook (WEO) (summary abstract here) has projected the most severe global recession since World War II, with the global economy set to shrink by 1.3% in 2009, compared to the 3.2% growth in 2008. It however claims that the economy would be back on the recovery path as the rate of contraction should moderate from the second quarter of 2009 onward, and estimates growth for 2010 at 1.9%.

The advanced economies are projected to contract by 3.8% in 2009 and by 2.8% and zero growth in 2010, emerging economies to grow by 1.6% and 4%, and Africa by 2% and 3.9% respectively. The IMF has revised the Indian growth projections downward to 4.5% and 5.6% for the next two years.

The WEO also estimates that unemployment will crest only toward the end of 2010, and should decrease after that. It advocates bold efforts to heal the financial sector and aggressive macroeconomic policies, both fiscal and monetary, to boost aggregate demand and "minimize the corrosive feedback from weakening real economic activity on the financial sector".

The IMF has estimated the total financial market losses from the sub-prime crisis to be $4.1 trillion, of which $2.7 trillion is from loans and assets originating in the United States, up from $2.2 trillion in the fund’s interim report in January, and $1.4 trillion last October.

The WEO also claims that emerging economies are now so closely integrated with advanced economies that financial stress transmits rapidly and forcefully, with financial linkages a key channel of transmission.

Calling for greater global financial market and economic surveillance, including tracking systemic linkages, the WEO report advocates taking action to prevent financial institutions becoming too interconnected and too big to cause serious collateral damage on the rest of the market. The report finds that markets that operated virtually or totally independently before the subprime crisis began to move together afterward, evidence that new channels of liquidity shocks were established during the second half of 2007.

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