The International Monetary Fund has revised its economic outlook downward, based on increasing data suggesting the global economic slowdown will persist through most of 2009.
 In its most recent World Economic Outlook report, the IMF projects world growth will fall to ½% in 2009, the most anemic rate since World War II. The new forecast marks a 1¾ percentage point decrease from the IMF’s November projections.
“Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy. A sustained economic recovery will not be possible until the financial sector’s functionality is restored and credit markets are unclogged,” the report says.
The IMF predicts that government stimulus policies will help the global economy recover in 2010, with growth of 3%. But the authors caution that “the outlook is highly uncertain.”
The IMF now expects output from the world’s advanced economies to fall 2% in 2009, which would be the first annual contraction since World War II. At the same time, the recent rapid growth among developing economies will slow dramatically this year, from 6¼% to 3¼%, predicts the IMF, citing falling demand for exports and financing, plummeting commodities prices, and tight credit.
The IMF also revised its forecast of commodity prices downward, projecting lower prices for oil, metals, and food in 2009. Such price declines will further hamper growth among economies that depend on commodities exports.
On the positive side, sluggish demand for goods and services worldwide has combined with falling commodity prices to lessen the threat of inflation. The IMF is now predicting record low growth in consumer prices of just ¼% in 2009 among advanced economies, and a dramatic slowing of inflation among emerging economies from 9½% in 2008 to 5¾% this year.
The greatest danger to the world economy, according to the IMF, lies in the potential continuation of a “pernicious feedback loop.” If government policies fail to restore confidence in the markets, asset values will continue to plummet, decreasing household wealth and cutting consumer demand, which in turn will fuel further drops in global output and trade, starting the cycle all over again.
“The scale and scope of the current financial crisis have taken the global economy into uncharted waters,” the IMF says. “The main risk is that unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth.”
On the other hand, the report says, if global financial conditions improve quickly in response to government actions, it would restore consumer and business confidence, alleviating the credit crunch and jump-starting global growth.
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