IMF: Recession Will Not End In 2009

Jonathan Bronstein, Talk Radio News Service

The dreary, Washington, D.C. weather was matched only by the International Monetary Fund’s, IMF, Spring 2009 edition of the World Economic Outlook. This report was rife with sobering news regarding the future of the economy.

Echoing many statements made by various IMF economists over the past few days during the IMF’s annual Spring meetings, the report expects 2009 to be a year of negative growth, and a year in which many nations willingness to continue to maintain low interest rates and stimulate the economy will be tested.

The report predicted that the global economy will decline by 1.3 percent, as a whole during 2009, which is the greatest rate of decrease since World War II. This also marks a dramatic revision from the IMF’s last WEO report in January 2009.

Economists have recognized that the world is in the midsts of a economic slowdown, but the extent of the recession was worse than expected.

“Global GDP went down by an unprecedented 6 percent at an annual rate in the last quarter of 2008,” said Olivier Blanchard, an economic counselor and director of research at the IMF, “and as far as we can tell, will most likely decline almost as fast in the first half of 2009.”

The six percent contraction of the world economy in 2008 followed four percent growth the previous year.

However, “Growth is expected to reemerge in 2010, but at just 1.9 percent would be sluggish relative to past recoveries,” according to the report.

The WEO attributes this slow growth to financial market stabilization taking longer than to occur then perviously believed, despite the strong and effective efforts by policy makers. The reason for such a long and protracted stabilization of the financial sector is because the amount of “toxic assets” globally will reach $4 trillion, according to the Spring 2009 Global Financial Stability report, which greatly exceeds the previous estimate of $2.7 trillion made in January 2009.

Another piece of sobering news was in regard to the unemployment rate.

“As long as growth is below its normal rate, then unemployment will continue to increase, and therefore our forecast implies that unemployment will crest only at the end of 2010,” said Blanchard.

But all was not entirely negative in the report, as it did stress how the world’s governments have taken the proper steps needed to stem the damage of the recession. The main policy that was universally applauded was the employment of stimulus, which reached 2 percent of global GDP, a level that the IMF encouraged governments to strive for.

Such bold policies are key because they convince the markets that the economic crisis is being dealt with in an effective manner, which leads to “a revival in business and consumer confidence,” according to the WEO report.

Another issue the WEO has become concerned about is in regards to deflation, or a consistent decrease in the prices of all goods with the exception of food and energy. 

The reason deflation becomes so dangerous is that it drives down the prices of goods as people perpetually hold off on buying any goods until they deem that they have reached their lowest level. Thus, commodity prices fall, which ripples throughout the economy.

Economists point to deflation, as the root cause of exacerbating already destructive economic crisis, like in Japan in the 1990s and throughout the world during the Great Depression in the 1930s.

“An indicator of global deflation risk has now risen to well above levels observed in 2002-03, when deflation was also a concern,” according to the WEO.

But, as frightening as this deflation crisis sounds, the IMF believes that it remains but a problem on the distant horizon, which must be overlooked when dealing with problems that are more pertinent in the present, like stimulation of the economy.

Regardless of the morose news, Blanchard remained upbeat, when he said “The need for strong policies on both the macroeconomic and financial is as acute as ever, but with such policies in place there is light at the end of the tunnel. World growth can turn positive by the end of this year and unemployment by the end of next year.”

IMF: The Recession May Not Be Over

By Jonathan Bronstein, Talk Radio News

The International Monetary Fund (IMF) released the last 2 chapters of their twice yearly World Economic Outlook (WEO). The report discovered that economic recessions of this global scale generally last 2 years. While this may make people feel optimistic, but when one realizes that the IMF economic recession began in June 2008, the report becomes more sobering.

Therefore, America is still in the thick of its recession.

“Recessions associated with financial crisis are longer and more severe,” said Marco Terrones, a key contributor to the IMF’s economic outlook, who has researched 160 recessions since 1960, and made distinctions between those related to the financial industry and those caused under other circumstances, like manufacturers overproduction.

The IMF believes that the recession began in June 2008, while the Bureau of Labor and Statistics says it began in December 2007. Thus, according to historical data discovered by the IMF, the recession should last until 2010.

But, this report was an analytical study of history and not an economic forecast, which will be released later this April.

Through this research, Terrones discovered that recessions caused by a failure of financial institutions last two years, or 2 quarters longer than all other recessions, and recovery takes about 3 years.

However, the statements made were not a prediction of the future, but a systemic analytical review of 20th century economic history. Also, only 6 recessions like this have occurred so the sample size is incredibly small, according to the IMF researchers who worked on the study.

“The twist of the current crisis is that bank lending linkages are the main driver,” said Stephan Danniger, another contributor to the IMF outlook WEO. As a result, the crisis quickly spread around the world, but nations that had the most connection to Western European banks were most vulnerable.

“The main recipient region was emerging Europe, and in a sense it is no surprise that an emerging Europe was the first to be hit hard by the crisis,” said Danniger.

Danniger stressed that countries, especially emerging ones, should continue to become integrated into the world economy because it is the most effective way to grow ones economy. But, such integration makes these nations vulnerable to external recessions.

So those who hope that the world is beginning the recovery process of the recession must heed the IMF assessment, that “recessions are likely to be unusually severe, and economic recovery will be sluggish,” said Terrones.