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March 20, 2009
The International Monetary Fund says the world economy, reeling from financial crisis, is on track to shrink for the first time in 60 years in 2009, by as much as 1%.

In a report prepared for the Group of 20 meeting of finance chiefs last week in Britain and published on Thursday, the IMF slashed forecasts from two months ago to a global contraction of between 0.5% and 1%. There was no specific forecast for Australia.

The latest IMF projections were sharply lower than those in the World Economic Outlook update published on January 28 that had put global growth at an annual rate of 0.5%.

“Global economic activity is falling – with advanced economies registering their sharpest declines in the post-war era – notwithstanding forceful policy efforts,” the IMF staff report said.

The revisions “reflect unrelenting financial turmoil, negative incoming data, sinking confidence, and the limited effect to date of policy responses with respect to the restoration of financial system health.”

The world economy was expected to gradually stage a “modest recovery” in 2010, with growth betweeen 1.5% and 2.5%, but downside risks were significant, it said.

Advanced economies were expected to suffer “deep recessions” in 2009, shrinking between 3.0 and 3.5%, according to the IMF report.

The Group of Seven major industrialised economies – Britain, Canada, France, Germany, Italy, Japan and the United States – were expected as a group to experience the sharpest contraction since World War II “by a significant margin”.

The United States, the world’s largest economy, was projected to contract at an annual rate of 2.6%, and Japan, the second largest, by a staggering 5.8%.

The 16-nation eurozone would contract 3.2%.

The IMF warned that the US and Japan have “high risks” of deflation, while that risk was “moderate” in several eurozone members, including Germany, Italy and France.

The Washington-based institution also sharply lowered growth projections for emerging and developing countries, to between 1.5% and 2.5%.

The IMF said that the G20 countries had not done enough to fight the recession and pointed out that its recommendation they implement stimulus measures amounting to 2% of output so far had largely been unheeded.

“Country reponses to the global crisis are in an early stage … measures are still needed to restore financial stability,” the IMF said.

Next year’s projected recovery depends on comprehensive policy steps to stabilise financial conditions, sizeable fiscal support, a gradual improvement in credit conditions, a bottoming of the US housing market, and the cushioning effect from sharply lower oil and other major commodity prices, the IMF said.



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