IMF Downgrades the Global Economy

Gosh, just when big global retailers were starting to make us feel warm and fuzzy with their comforting predictions that the recession has bottomed out, along comes the International Monetary Fund to put us back on Prozac.

In its latest World Economic Outlook, the IMF projects that the global economy will shrink by 1.3 percent this year (chart below). Just three months ago, the Fund had forecast an increase of 0.5 percent this year.

At the same time, it said that a "slow recovery" will "take hold next year." For the U.S. specifically and advanced economies generally, that "slow recovery" will manifest itself in a growth rate of zero percent in 2010. Meanwhile, the IMF adds, unemployment is unlikely to start falling until the end of 2010.

On the bright side, if you can call it that, IMF Chief Economist Olivier Blanchard said things would be even worse without the various banking bailouts and economic stimulus programs that governments have enacted around the world.

"This 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," Blanchard said. "But, with such policies in place, there is light at the end of this long tunnel."

How long and how dark has the tunnel been? Quantitatively, the IMF said that the world's advanced economies output shrank by 7.5 percent in the fourth quarter of 2008, a drop it characterized as "unprecedented." It estimated that the pace of decline probably continued into the first quarter of 2009.

The Fund's recommended treatment is no surprise: Force banks to come clean on all of their impaired assets, the get the banks recapitalized. Only then, the IMF said, will the ocean of fiscal stimulus begin to refloat the economy.

by Mark Stein