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IMF wants nations to pass large fiscal stimulus packages

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The unique characteristics of the global recession will require large, but focused, fiscal stimulus packages by nations around the globe, so says a leading international policy and research group.

The International Monetary Fund said the drop in demand requires a substantial fiscal stimulus of at least 2% of world domestic product (WDP), coordinated action, with a focus on spending and targeted tax cuts.

Roughly 2% of WDP would amount to $1.5-1.8 trillion in fiscal stimulus, according to research compiled by economist Peter Dawson.

"Fiscal stimulus by nations may have to be larger than that, given how much the global economy has slowed during the past year," Dawson said. "The IMF forecasts a WDP growth rate of 2.2% in 2009 but it will probably dip below that, which would suggest a need for an even larger fiscal stimulus, probably upwards of $2.0-2.3 trillion for 2009."

The unique factor driving the need for the above? For the first time in the post-World War II era, all major regions of the world -- U.S., E.U., China/Japan -- are in recession at the same time, as are the emerging market economies of India, Brazil, and Russia, Dawson said.


Further, Dawson agreed with the IMF that budget deficits -- something the IMF normally chides governments for -- should not be the focus now. "In normal times, they would be, but these are not normal times, as the IMF takes pains to point out," Dawson said. "We have to do what's needed to increase demand in 2009 and 2010."

Economic Analysis: The IMF also argued against troubled-industry rescues, such as the U.S. auto sector rescue, and against general as opposed to targeted tax cuts, stating that they'll do little to stimulate the global economy. Economist Dawson added that provided the world approved about $2 trillion in fiscal stimulus by early 2009, the global economy could begin to recover by Q3 2009.

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Last updated: November 27, 2009: 06:43 PM

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