The International Monetary Fund said the global recession will be deeper and the recovery slower than previously thought as financial markets take longer to stabilize. The Washington-based IMF said in a forecast released today that the world economy will shrink 1.3 percent this year, compared with its January projection of 0.5 percent growth. The lender predicted expansion of 1.9 percent next year instead of its earlier 3 percent projection. The fund’s latest outlook highlights the precarious state in which the world economy remains, even amid signs the worst slump since World War II may be easing. Recovery isn’t assured and will depend on policy efforts to cleanse banks’ balance sheets and craft measures that spur demand, the IMF said. “The key factor determining the course of the downturn and recovery will be the rate of progress toward returning the financial sector to health,” the fund said in its semi-annual World Economic Outlook. At a briefing in Washington, IMF Chief Economist Olivier Blanchard said while a recovery will start early next year, a “return to normal” will take much longer. Having said this time last year that the world economy would grow 3.8 percent in 2009, the IMF tied its more pessimistic assessment to a “recognition that financial stabilization will take longer than previously envisaged.” Managing Director Dominique Strauss-Kahn foreshadowed the prediction of a contraction a month ago. Credit Losses The revised outlook comes a day after the fund calculated worldwide losses from distressed loans and securitized assets may reach $4.1 trillion by the end of 2010 as the recession and credit crunch exact a higher toll on financial institutions. “Financial strains in the mature markets will remain heavy well into 2010,” that report said. U.S. regulators are putting some of the largest U.S. banks through so-called stress tests to determine the amount of capital each needs to withstand a further economic slide. Morgan Stanley reported a bigger-than-estimated $177 million loss and slashed its dividend to 5 cents as real estate and debt-related writedowns overwhelmed trading gains. Even as the IMF acknowledged “tentative indications” that the rate of contraction is moderating around the world, the fund said output per capita would decline this year in countries representing about 75 percent of the global economy. Output Gap The rebound will be slower than usual because the slump was caused by a financial crisis and is synchronized around the world, the fund said. The report included a table which showed the so-called output gap, the excess of world supply over demand, will remain negative for the foreseeable future. Advanced economies will continue to lead the slump by shrinking 3.8 percent this year and failing to grow in 2010, the IMF said. The fund cut its forecasts for this year and next for all the Group of Seven economies and said Germany, Italy and the U.K. will still be shrinking in 2010. The U.S. economy will slide 2.8 percent this year before stalling next year and the euro area will contract 4.2 percent in 2009 and 0.4 percent in 2010, the report said. While Japanese gross domestic product will fall 6.2 percent this year, it will then rise 0.5 percent next year. Speaking ahead of the April 24 meeting of G-7 finance ministers and central bankers in Washington, U.S. Treasury Secretary Timothy Geithner today cited the IMF data as reason for officials “to strengthen the basis for recovery.” ‘Major Role’ Blanchard said in a Bloomberg Television interview today that the U.S. will play a “major role” in determining when the global economy and key nations start turning around. “The rest of the world is not going to recover unless the U.S. recovers.” Emerging and developing economies will grow 1.6 percent this year and 4 percent next year, reductions of 1.7 percentage point and 1 percentage point respectively from previous forecasts, the IMF said. They will suffer net capital outflows of more than 1 percent of GDP this year and only the highest- grade borrowers will be able to tap new funding. The risk of corporate defaults in such economies is also “rising to dangerous levels,” the IMF said. Growth in China, where the IMF said there is scope for further easing of monetary and fiscal policy, is forecast to slow to 6.5 percent this year before climbing to 7.5 percent in 2010. India’s economy will grow 4.5 percent in 2009 and 5.6 percent in 2010, compared with 7.3 percent last year. Deflation Risk While stopping short of predicting deflation, the fund said the risk was greater than during the last such scare earlier this decade. Consumer prices will drop 0.2 percent in advanced economies this year before rising 0.3 percent next year and there is a risk of a steeper initial decline, the IMF said. Policy makers were urged to “act decisively” and not delay their responses to the financial crisis. Balance sheets should be revived by removing bad assets and injecting new capital, the IMF said. Monetary and fiscal policies should be “geared as far as possible” to bolstering demand and where flexibility remains for more monetary stimulus, such as at the European Central Bank, it “should be used quickly,” the fund said. “In advanced economies, scope for easing monetary policy further should be used aggressively to counter deflation risks,” the fund said, forecasting interest rates will remain near zero in major economies. Governments should not prematurely withdraw stimulus measures, it said. Fiscal Impact At the briefing after the report was released, Blanchard said “strong” fiscal policies thus far have made a “gigantic difference,” while urging governments to resist complacency. “Things are not great, they could have been extremely bad,” Blanchard said. “To the extent that more can be done, it should be done.” Exit strategies also should be outlined for when recovery takes hold, the fund said. “Acting too quickly would risk undercutting what is likely to be a fragile recovery, but acting too slowly could risk a return to overheating and new asset- price bubbles,” it said. Risks to the outlook remain skewed to the downside and include the possibility that policies will fail to stop weakening economies and financial conditions from feeding on each other. “In a highly uncertain context, fiscal and monetary policies may fail to gain traction,” the report said. Meanwhile, the fund said confidence and spending could be revived faster than expected should investors endorse policy steps by authorities. Global Trade Global trade is forecast to plunge 11 percent this year after expanding 3.3 percent in 2008, undermining economies that rely on exports such as those of Germany and China, according to the report. The crisis has prompted a “flight to safety” which boosted the major currencies. The slowdown is hurting companies such as Caterpillar Inc., the world’s largest maker of bulldozers and excavators, which yesterday posted its first quarterly net loss in 16 years as a result of the global recession. Peoria, Illinois-based Caterpillar said it expects the world economy to decline about 1.3 percent this year. Chief Executive Officer Jim Owens has already cut more than 24,000 jobs since December. Such cutbacks will propel unemployment to 9.2 percent next year in the advanced economies from 8.1 percent this year, while in the U.S. the jobless rate will jump to 10.1 percent in 2010, the IMF said. The Labor Department said this month that unemployment in the U.S. climbed to a 25-year high of 8.5 percent in March. Yahoo! Inc., owner of the second-most popular U.S. Internet search engine, announced payroll cuts yesterday, citing a slowdown in online-advertisement sales. The company, based in Sunnyvale, California, said it will cut 5 percent of its workforce or 700 jobs. “It’s going to be a while before a report is going to say there’s clear signs of an economic recovery,” said Colin Bradford, an economist at the Brookings Institution in Washington.

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