The deepening U.S. recession and the worsening worldwide economic downturn will likely continue for some time, an analysis by the International Monetary Fund predicted Thursday.
Once the U.S. and global recoveries finally begin, perhaps by the fourth quarter, they are likely to be weak, the IMF and other economic forecasters said. Even after the recession’s trough is reached, the U.S. unemployment rate will probably remain at a highly elevated level for several quarters as the economy expands at a sluggish rate.
The world economy has hit a trifecta of mutually intensifying contractionary forces, the IMF said.
In a survey of 122 recessions that have afflicted 21 advanced economies since 1960, the IMF concluded that downturns associated with financial crises “have typically been severe and protracted, whereas recoveries from recessions associated with financial crises have typically been slower.”
The IMF also found that highly synchronized recessions afflicting most of the world economy are “longer and deeper than other recessions, and recoveries from these recessions are typically weak.”
Finally, developments in the United States, where the financial crisis began in December 2007, often play a “pivotal role in both the severity and duration of these highly synchronized recessions,” IMF research shows.
Each of these three factors is at play in the current recession.
“Clearly, we are experiencing the most tightly synchronized major postwar recession, and the financial crisis is global in nature,” said Sara Johnson, managing director for global macroeconomics at IHS Global Insight, an economic and financial forecasting and consulting firm in Lexington, Mass.
“Financial crises are common, but in many cases they are confined to a single country or region. Today, however, we are in the worst of all possible situations,” Ms. Johnson said in an interview. “All forces, including a double-digit decline in the volume of world trade, are at work spreading the pain around the globe.”
The IMF will not be releasing its latest economic forecast until next week, but IHS Global Insight projects that the global economy will contract by 2.5 percent this year.
The U.S. economy will continue declining through the third quarter of this year, Ms. Johnson said. Modest growth will begin during the October-December period, but it will not be vigorous enough to keep the unemployment rate from rising.
The U.S. unemployment rate, which has jumped from 4.7 percent in November 2007 to 8.5 percent last month, will peak in early 2010 at 10.2 percent and essentially remain at that level for the balance of next year, according to the IHS Global Insight forecast.
One reason the global recovery will be so weak, the IMF explained, is that fewer countries will be able to depreciate their currencies simultaneously to expand their exports. In the past, that option has helped countries recover from financial crises that were far less synchronized than the current one.
Also, private consumption is likely to remain flat in the United States for some time, depriving export-led economies a robust market for their goods.
Echoing the argument of President Obama at the April 2 Group of 20 economic summit in London, the IMF said that expansionary fiscal policy “seems particularly effective in shortening recessions associated with financial crises and boosting recoveries.” The IMF recommended that fiscal stimulus “should be provided by a broad range of countries with fiscal room to do so.”
“In effect, governments can break the negative feedback between the real economy and financial conditions by acting as ‘spender of last resort,’ ” the IMF argued.