IMF says global economy to shrink 1%

THE GLOBAL economy will shrink as much as 1 per cent this year, its first contraction since the second World War, the International Monetary Fund warned yesterday as it urged quick action to brace the financial sector for the downturn.

Separately, a Slovenian government minister said the euro zone economy will contract by 4.1 per cent this year according to the latest OECD forecast. The figure is even lower than the 3.5 per cent GDP shrinkage the IMF predicted for the euro zone this year, which was itself 1.2 percentage points weaker than the IMF was counting on as recently as January.

In two reports prepared for a meeting of G20 nations last week, the IMF said it was still forecasting a modest economic recovery in 2010. But it zeroed in on the problem of so-called “toxic assets” on banks’ balance sheets, saying the sooner they were dealt with the better.

“Even in countries where banking sectors still appear resilient, the deepening global financial crisis is likely to imply greater stresses,” the IMF said. It said G20 countries should also develop plans for coping with stricken financial institutions so they do not infect the broader economy.

Its expectations for economic performance are darkening. In January, the IMF projected the global economy would grow by 0.5 per cent in 2009 rather than shrink, but it said those prospects were being worn down by the severity of the financial crisis.

“The prolonged financial crisis has battered global economic activity beyond what was previously anticipated,” said the report published yesterday.

The reports will flavour discussions on April 2nd in London, when political chiefs including US president Barack Obama join finance ministers from the G20 for another round of talks that will aim to bolster hopes that the recession’s impact can be cushioned.

The IMF said advanced economies were in a severe recession that will shrink their economies by a range of 3.0 per cent to 3.5 per cent in 2009, improving to around zero growth in 2010.

It said the US economy would likely contract by 2.6 per cent this year, while the euro area economy would decline by 3.5 per cent in 2009. Japan will likely suffer a 5.8 per cent contraction in 2009 and will continue to shrink in 2010 by 0.2 per cent.

Meanwhile, emerging and developing economies are slowing abruptly and likely to see growth taper to between 1.5 per cent and 2.5 per cent in 2009, recovering slightly next year to between 3.5 per cent and 4.5 per cent.

“Capital account pressures are intensifying for many emerging economies, amidst a contraction in cross-border lending,” the IMF said. – (Reuters)