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IMF: Global economic slowdown a certainty, due to financial crisis

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The financial crisis that's constrained credit around the world will slow the global economy considerably and quickly, the International Monetary Fund announced in its October 2008 report.

The IMF now expects global GDP growth to slow to 3.0% in 2009, down from 3.9% forecast in its July 2008 report.

Moreover, economists note it's important to highlight the differences in what constitutes a recession in the developing and developed worlds. Because emerging markets/ developing countries are capable of and require higher growth rates, a low GDP growth rate is roughly equivalent to a negative GDP growth rate in developed countries -- i.e. equivalent to a recession. The average of the two means the global economy can be considered to be in recession when global GDP falls below 3.0%, certainly if it falls below 2.5%.

Worst global GDP growth since 2001-2003


Economist David H. Wang told BloggingStocks the IMF's latest forecast points to a global recession, or the closest condition to it.

"It is a somber report, no question. Many developed nations will now record close-to-negative or negative GDP growth for 2009. Add slowing emerging market growth and a credit market that will be in recovery mode for much of 2009 on to high commodity prices, and it's a formula for the worst global economic conditions since the 2001-2003 period," Wang said.

The IMF now expects the U.S. economy to record 1.6% GDP growth in 2008 and just 0.1% in 2009. IMF 2008/2009 GDP forecasts for other key economies are as follows: United Kingdom, 1.0% / -0.1%; Germany: 1.8% / NA; France, 0.8% / 0.2%; Japan, 0.7% / 0.5%; China, 9.7% / 9.3%; India, 7.9% / 6.9%; Brazil, 5.2% / 3.5%; and Mexico, 2.1% / 1.8%.




Further, while almost all policy maker attention is appropriately and justifiably focused on jump-starting credit markets and removing toxic assets from the banking system, after the crisis has been resolved, Wang said policy makers, along with financial service regulation reform, should also address a major flaw in the global economy: those aforementioned high commodity prices, primarily oil.

"Even before the financial crisis reared its head, oil prices had reached economically damaging levels when oil hit $80 then $90 per barrel," Wang said. "Many economic models indicated that adequate U.S. and European growth could not be sustained with oil prices at those levels. However, little was done regarding energy policy, both conservation and production, in the United States to reduce prices. Now the financial crisis has made what had been a weak U.S. economy even weaker. In the United States, the new Congress has to eliminate America's vulnerability to high oil prices."

Economic Analysis: The IMF also urged countries to coordinate policy responses, when appropriate to address the financial crisis, and it estimated that governments globally may have to spend $2 trillion to remove distressed/bad assets from the financial system. Along with recapitalization of selected banks, and maintenance of access to commercial credit, Wang and other economists have cited asset removal as a key to ending the financial crisis.

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Last updated: July 06, 2009: 02:32 PM

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