World Economic Outlook Report 2009

With the global economy reeling under recession, the International Monetary Fund (IMF) in its World Economic Outlook Report 2009, released on April 22, 2009 stated that world production was projected to decline by 1.3 per cent in 2009, indicating that the slump is the deepest since the Second World War. However, it is expected to recover only gradually in 2010, growing by 1.9 per cent, the IMF report revealed.

The IMF report projected a negative growth rate for the global economy and for all the advanced economies – United States, Japan, Germany, Britain, France, Italy, Spain and Canada.

The world economy is set for a minus 1.3 per cent growth this year, before rising modestly (1.9 per cent) in 2010. The US also faces the prospect of a minus 2.8 per cent growth this year and zero growth in 2010.

Unprecedented Decline

The IMF stated that advanced economies experienced an unprecedented 7.5 per cent decline in real GDP during the fourth quarter of 2008, and the output is estimated to have fall during the first quarter of 2009.
In contrast to the negative growth of the advanced nations, emerging and developing economies as a group are still projected to eke out a modest 1.6 per cent growth in 2009, rising to four per cent in 2010.

It is not only the US which has experienced a sharp downfall, but also other economies of the world too have had the same fate, including the western Europe and advanced Asia, it said. Emerging economies, too, are suffering badly and contracted four per cent in the fourth quarter in the aggregate.

While there have been some encouraging signs of improvement since the G-20 Summit in London early this month, the report said confidence in financial markets is still low, weighing against the prospects of an early economic recovery.

The April 2009 Global Financial Stability Report (GFSR) estimates write-downs on US-originated assets by all financial institutions over 2007-10 will be $2.7 trillion, up from the estimate of $2.2 trillion in January 2009. This is largely a result of the worsening prospects for economic growth.

Asian Economies

While the US economy may have suffered particularly from intensified financial strains and the continued fall in the housing sector, western Europe and advanced Asia have been hit hard by the collapse in trade as well as rising financial problems of their own and housing corrections in some national markets, the report stated.

Activity in East Asian economies with heavy reliance on manufacturing exports has fallen sharply, although the downturns in China and India have been somewhat muted given the lower shares of their export sectors in domestic production and more resilient domestic demand, it noted.

Although conditions should improve moderately in 2010, the IMF expects the availability of external financing to emerging and developing economies to remain highly curtailed.


Global Exposures
Total expected write-downs on global exposures are estimated at about $4 trillion, of which two-thirds will fall on banks and the remainder on insurance companies, pension funds, hedge funds, and other intermediaries, the report stated.

An important side effect of the financial crisis, the report stated, has been a flight to safety and return of home bias, which have had an impact on the world's major currencies. Since September 2008, the US dollar, euro, and yen have all strengthened in real effective terms.

As the report projections assume that financial market stabilisation will take longer than previously envisaged, even with strong efforts by policymakers, the IMF stated that financial strains in mature markets are projected to remain heavy until well into 2010.

India’s Growth

The IMF has further lowered India’s growth prospects for 2009 to a mere 4.5 per cent – down from the 6.3 per cent it had forecast last October and 5.1 per cent in January 2009.

The projected decline is a lot more precipitous when compared with the growth level recorded in the last two years – 9.3 per cent in 2007 and 7.3 per cent in 2008. During 2010, the IMF expects India to recover a bit, recording 5.6 per cent growth.

Massive Financial Crisis
The global economy is in a severe recession inflicted by a massive financial crisis and an acute loss of confidence, the IMF report stated. Wide-ranging and often unorthodox policy responses have made some progress in stabilizing financial markets but have not yet restored confidence nor arrested negative feedback between weakening activity and intense financial strains.

The report made it clear that the projection of a gradual recovery next year will depend on authorities acting decisively to restore financial stability, and fiscal and monetary policies in the world’s major economies providing sustained strong support for aggregate demand.

Emerging markets, which were relatively sheltered earlier from the financial strains because of their limited exposure to the US sub-prime market, have been hit hard by recent events. New securities issues came to a virtual stop, bank-related flows were curtailed, bond spreads soared, equity prices dropped, and exchange markets came under heavy pressure.