The International Monetary Fund has said that the global economy in 2009 is likely to contract for the first time since the Second World War. The IMF now estimate that global GDP contracted by an extraordinary 5% at an annualized rate in the fourth quarter of 2008. Moreover, global output continues to decline at a similar pace in the current quarter based on recent data on industrial production, business and household sentiment and trade.

A senior IMF official said that "At this point, we expect global GDP to decline between 0.5% and 1% in 2009 before recovery gradually gets underway in 2010. The major advanced economies, the United States, the Euro Area and Japan, are all suffering severe recessions. The emerging and developing economies are slowing abruptly and many of these are also likely to see falls in activity in 2009."

He added that "First, the data for the fourth quarter of 2008 and for early 2009 show an even sharper contraction in output and trade than we had anticipated earlier as negative interactions between real and financial sectors have intensified. Second, progress in putting in place policies to deal with the financial crisis has been slow and financial strains are likely to place a continuing drag on activity."

The official said that "Observing that credit conditions remain severely impaired and uncertainty about bank balance sheets remains high impeding a return of market confidence. We do still see a global recovery getting gradually underway in 2010, but I should emphasize that the turnaround depends on strong policy implementation."

He said that "The essential elements include credible recognition of losses in problem assets, public support for the recapitalization of weak but still viable banks and for the effective resolution of insolvent banks. It will be important for greater international coordination of financial sector policies to avoid unintended cross border spillovers. It will also be important that actions taken be consistent with a long term vision of a healthy, efficient and dynamic financial system."

The official further added that it will be important for emerging and developing economies to balance the need to support domestic demand in the face of sharp declines in exports with the risks of accentuating capital outflows and undermining financial stability.

(Sourced from Economic Times)