Australia | Oct 09 2008
By Andrew Nelson
The International Monetary Fund has issued a bleak assessment of the world economy and confirmed both the United States and Europe are on the brink of recession if not already in one. The IMF said in its latest World Economic Outlook report that it is now expecting global growth to decline from 5% percent in 2007 to 3.9% in 2008 and 3% in 2009.
The IMF said current financial upheaval was still developing and that it would continue to exact a heavy economic toll as global credit is choked off and markets continue to come to grips with plummeting confidence.
The headline numbers are well below those issued in July and reflect the increasing evidence that the ever worsening the financial crisis is having a heightened effect on developed economies and that financial deleveraging will continue to hamper growth.
“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 .
The institution expects that the more advanced economies will only grow at around 0.5%, rather than 1.4% it was predicting only a few months ago. The US economy is now projected to grow only 0.1%, rather than the 0.8% projected three months ago, while the euro-zone economy is expected to grow only 0.2%, rather than 1.2%. Japan also suffers a big cut in expectation, with growth now expected at a rate of 0.5%, not 1.5%.
Growth in emerging and developing economies is also projected to continue to decelerate, but the expected growth rate is a much healthier 6.1%, rather than 6.7% previously forecast.
The good news is that the institution expects China to weather the storm, which translates into a definite positive for Australia. China’s growth-rate forecast was only marked down to 9.3% from a previous 9.8%, leaving Australia in a good position to continue selling significant exports to its big Asian neighbour.
Australian Finance Minister Lindsay Tanner told ABC Radio today that the vast bulk of China’s growth has been generated by domestic activity, which should continue to see demand for minerals, particularly Australian minerals.
“And we believe that’s one of the important factors protecting Australia to some extent, from the influences of the US financial crisis,” she offered.
The IMF outlook for Australian growth is also fairly healthy compared to other developed economies, with the institution predicting about a 2.5% increase for the current year and a still resilient 2.2% next year. The growth rate was 4.2% in 2007.
The IMF was also fairly upbeat in its assessment of the coordinated interest-rate cut of half a percentage point delivered by the US Fed, European Central Bank, Bank of England, Switzerland, Canada and Sweden overnight. IMF chief economist Olivier Blanchard told reporters the coordinated drive was a step in the right direction, but cautioned more is still needed, especially in Europe.
However, he downplayed the prospects of a global depression provided appropriate policies were put in place, but he did warn that Europe still looked like it was having some difficulty in figuring out how to deal with the crisis. If they do figure it out, then “the risk of a ‘Great Depression’ is nearly nil,” he concluded.
The fund said that the immediate challenge for policy-makers the world over is to stabilise credit markets and to help economies limp though the global downturn as best they can while keeping inflation under control.
That said, the fund expects headline inflation to recede quickly as the credit crisis deepens and economies slow down. It estimates that inflation in advanced economies will likely ease to below 2% by the end of 2009, while in developing economies, inflation is expected to remain at about 8%.
At the same time, global trade is expected to slow from 7.2% growth in 2007 to 4.9% in 2008 and 4.1% in 2009.