Yesterday, the IMF released its most recent bi-annual World Economic Outlook (WEO). According to the WEO report, “the global economy is projected to shrink by 1.3 percent in 2009, with a slow recovery expected to take hold next year.” The report also forecasts that economic contraction this year in advanced economies would be around 3.8 percent (projected 2.8 percent decline in the U.S.), while emerging and developing economies are expected to experience a positive growth of 1.6 percent, climbing to 4.0 percent in 2010. Overall the WEO report projects a bleaker economic outlook than the IMF’s original estimates released earlier this year.
The WEO report, which was released in preparation for the IMF-World Bank Spring Meetings this week in Washington, concludes that “[a]chieving the projected turnaround will depend on stepping up efforts to heal the financial sector, while continuing to support demand through monetary and fiscal easing.” The report also emphasizes the importance of countries moving quickly to adopt “plans to deal with the financial crisis" but stresses that “macroeconomic policies should be geared to supporting demand to minimize the corrosive feedback from weakening real economic activity on the financial sector.
IMF Chief Economist Olivier Blanchard cautioned that “[t]his is not the time for complacency, and the need for strong policies, both on the macro and especially on the financial fronts, is as acute as ever. But, with such policies in place, there is light at the end of this long tunnel. World growth can turn positive by the end of this year, and unemployment can start decreasing by the end of next year.”
The report identifies continued funding strains as a result of limited access to credit by financial institutions around the world which have “spread well beyond short-term bank funding markets in advanced economies.” The report also notes that “[t]he broad retrenchment of foreign investors and banks from emerging economies and the resulting buildup in funding pressures are particularly worrisome.”
The report emphasizes the importance of greater international cooperation to avoid both “exacerbating cross-border strains” and “adverse international spillovers from national actions.” The report, however, notes that support from international actors like the IMF could play an instrumental role in cushioning the impact of the financial crisis. Such efforts particularly in the case of the IMF will be enhanced by its recent efforts to improve its lending framework and contributions by member countries to increase its lendable resources.