- The Washington Times - Thursday, April 23, 2009

The crisis engulfing the world’s financial markets is dragging the global economy deeper into recession and making it likely that recovery will be much slower than previously anticipated, the International Monetary Fund reported Wednesday.

The world economy will shrink by 1.3 percent this year, the IMF said. Overall economic activity in advanced countries, including the United States, the euro area, Britain, Japan, Canada, the Asian tigers and others, will contract by 3.8 percent in 2009.

As recently as January, the IMF had projected that the world economy would expand by 0.5 percent this year.

The volume of world trade is expected to plunge by 11 percent this year and rise by only 0.6 percent next year.

“By any measure, this downturn represents by far the deepest global recession since the Great Depression,” the IMF said in its biannual World Economic Outlook.

World output will expand by a modest 1.9 percent next year, “well below potential,” the fund said. The slow recovery next year is “consistent with findings that recoveries after financial crises are significantly slower than other recoveries,” the IMF explained.

The fund’s forecast for the United States calls for output to shrink 2.8 percent this year and remain flat in 2010.

The IMF’s U.S. forecast is far more pessimistic than the growth projections that appeared in President Obama’s 2010 budget, which was released in late February. The White House forecast the economy would dip only 1.2 percent this year and then expand at a robust rate of 3.2 percent next year.

The U.S. unemployment rate, which jumped to 8.5 percent in March, its highest rate in more than 25 years, will average 10.1 percent in 2010, according to the IMF’s forecast.

“As long as growth is below normal, unemployment will continue to increase,” said IMF chief economist Olivier Blanchard in a briefing Wednesday. “We thus expect unemployment to crest only towards the end of 2010, and to decrease after that.”

By the time the U.S. housing-price correction runs its course, home prices will have plunged more than 35 percent from their peak, the IMF estimated. That means home prices will likely fall an additional 10 percent to 15 percent, it said.

As gloomy as the IMF outlook was, the report acknowledged that “downside risks” to its forecast were dominant.

Mr. Blanchard noted that banks were still retrenching and securities markets were still poorly functioning. “The longer this goes on, the longer and deeper will be the recession,” he said. “And the longer and deeper the recession, the worse will be the health of the financial system. Together, these two feedbacks create the risk of a vicious cycle, and a much worse outcome than in our [forecast].”

The IMF’s updated forecast “advocates the use of unconventional fiscal and monetary policy to contain what it calls ‘the deepest global recession since the Great Depression,’ ” said Sara Kline of Moody’s Economy.com. “This matches [our] global economic outlook, which assumes that the largest economies will enact extraordinary measures to prevent a deeper slide into contraction.”

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