The world economy will slow sharply this year and next, with the United States likely sliding into recession reflecting mounting damage from the most dangerous financial jolt in more than a half-century.
The International Monetary Fund, in a World Economic Outlook released Wednesday, slashed growth projections for the global economy and predicted the United States – the epicenter of the financial meltdown – will continue to lose traction.
“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,” the IMF said in its report.
The IMF now projects that the global economy, which grew by a hardy 5 percent last year, will lose considerable speed, slowing to 3.9 percent this year. It is forecast to weaken even more – to just 3 percent – next year, marking the worst showing since 2002. In the past, the IMF has called global growth of 3 percent or less the equivalent to a global recession.
The IMF’s projection was made before the Federal Reserve and six other major central banks from around the world slashed interest rates Wednesday in an attempt to prevent a financial crisis from becoming a global economic meltdown.
The Fed reduced its key rate from 2 percent to 1.5 percent. In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 percent, while the European Central Bank sliced its rate to 3.75 percent.
Also taking part were the central banks of China, Canada, Sweden, and Switzerland. The Bank of Japan said it strongly supported the actions.
The financial crisis, which erupted in the United States in August 2007 and has quickly spread around the globe, entered a tumultuous new phase last month, badly shaking confidence in global financial institutions and markets, the IMF said. It has triggered a cascading series of bankruptcies, forced mergers and radical government interventions – such as the United States’ unprecedented $700 billion financial bailout – to stem the fallout.
The new projections come before a gathering of the world’s top economic powers on Friday and the weekend meetings of the IMF and the World Bank. The jarring financial crisis is likely to figure prominently in those discussions.
In the United States, the economy, which grew by 2 percent last year, is projected to slow to 1.6 percent this year. Growth would screech to a virtual halt in 2009, barely budging at just 0.1 percent. That would mark the worst showing since 1991, when the country was pulling out of a recession.
“With a recession now looking increasingly likely, the key questions are, how deep will the downturn be, when will a recovery get under way and how strong will it be?” the IMF asked. Much will hinge on how effective the United States’ steps to stabilize financial markets and get credit flowing more freely again turn out to be. Another important factor is whether these and other actions turn around U.S. consumers, whose retrenchment is hurting the economy.
The IMF – and many private economists – believe the U.S. economy will probably contract in the final three months of this year and the first three months of next year, meeting a classic definition of a recession. The economy’s last recession was in 2001.
The government’s bailout package is aimed at thawing lending by buying bad mortgage-related debt from troubled financial institutions. The idea is that the banks’ books would then be cleaner, putting them in a better position to lend and get the economy moving.
The IMF said this effort should help to stabilize markets but even so “the process of balance-sheet repair will be long and arduous.” Credit availability is likely to remain constrained throughout 2009, the IMF said.
Fed Chairman Ben Bernanke warned in a speech Tuesday that the economy’s outlook for this year has darkened and the pain could last for some time. His remarks were seen as heralding the rate cut Tuesday.
Looking at other countries, Germany’s growth will slow to 1.8 percent this year, down from 2.5 percent last year. France’s growth will weaken to just 0.8 percent, compared with 2.2 percent in 2007. Britain’s economy will see growth taper to 1 percent, down from 3 percent last year. Canada’s growth will tail off to 0.7 percent this year, from 2.7 percent last year.
In Japan, growth will cool to just 0.7 percent, from 2.1 percent last year.
Global powerhouses China and India will see growth clock in this year at a robust 9.7 percent and 7.9 percent, respectively. Even if those projections prove correct, they would still mark downgrades from their blistering performances last year. Russia’s economy should grow by a brisk 7 percent this year, down from 8.1 percent last year.
Inflation around the world remains high, driven up by surging energy and food prices through much of this year.
It will be tricky for Bernanke and his counterparts in other countries to navigate weak growth and inflation pressures, the IMF said.
“The immediate policy challenge is to stabilize financial conditions, while nursing economies through a period of slow activity and keeping inflation under control,” it said.