WASHINGTON (Reuters) - The International Monetary Fund, in its bleakest forecast in years, said on Wednesday the world economy was set for a major downturn with the United States and Europe either in or on the brink of recession.
The IMF said the worst financial trauma since the Great Depression would exact a heavy economic toll as investors wrestle with a crisis of confidence and global credit is choked off.
“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,” the IMF said in its World Economic Outlook.
The assessment was written before a coordinated half-percentage point interest-rate cut on Wednesday by the U.S. Federal Reserve, European Central Bank, Bank of England, Switzerland, Canada and Sweden.
China also joined the move with a more modest cut.
The IMF’s new chief economist, Olivier Blanchard, said the coordinated drive was a step in the right direction but more action may be needed as the world economy slows.
“Fifty basis points is not nothing,” Blanchard told a news conference. But he said monetary policy was only part of the answer and further measures were needed to clear up clogged credit markets. “More is needed, in particular in Europe,” he said.
In an interview with Reuters, Blanchard said the rash of crises in recent weeks had convinced world policy-makers that it was time to work together to find a way out of the credit crisis, which has raged for 14 months.
“Events focus the mind,” Blanchard said. “What’s absolutely essential to solve this financial crisis is the perception by the public and by the markets that there is a coherent plan.”
In its twice-yearly World Economic Outlook, the IMF slashed its 2009 forecast for world growth to 3 percent, which would be the slowest pace in seven years, from a July projection of 3.9 percent, and warned that a recovery would be unusually slow.
It said growth this year would come in at 3.9 percent, a touch below the 4.1 percent it projected in July.
While the world economy was unusually frail, Blanchard told reporters there was little chance of a global depression, provided leaders quickly adopt policies to address market distress.
“If the right policies are in place, then the probability of a ‘Great Depression’ is extremely small,” he said.
Blanchard said leaders in Europe were having “some difficulty” agreeing on how to deal with the crisis but the financial markets were forcing them to move quickly.
If they succeed, “the risk of a ‘Great Depression’ is nearly nil,” he added.
The IMF blamed lax economic and regulatory policies for the current woes, saying they probably allowed the global economy to “exceed its speed limit.” At the same time, market flaws combined with policy shortcomings to allow stresses to build.
Now, the world is about to pay the price.
The IMF had believed developing economies could largely steer clear of any painful spillover from the credit mess, but no longer. In its latest report, the global economic watchdog warned emerging and developing economies are also slowing, in some cases to rates well below trend.
At the same time, the combination of soaring food and fuel prices has pushed inflation to levels unseen in a decade, the IMF said, exacting an especially heavy toll in the developing world where families’ spending on food is high.
In advanced economies, oil price increases have also been felt, but underlying price pressures appear contained.
The immediate challenge for policy-makers is to stabilize credit markets, while nursing economies through the global downturn and keeping inflation under control, the fund said.
It sees the U.S. economy screeching to halt and warned a recession was increasingly likely.
For all of next year, it projects U.S. growth of just 0.1 percent. The near-term course of the U.S. economy, the IMF said, will largely depend on the effectiveness of recent government initiatives to combat the spreading credit crisis.
In Europe, the crisis has stalled growth, and interest-rate cuts and decisive government action to restore confidence to prevent a lasting slowdown are needed, the report said.
The fund said growth in the euro zone was set to slow to 1.3 percent in 2008, easing to a scant 0.2 percent in 2009.
Asian powers China and India will also experience slower growth due to weaker exports, but should continue to be supported by solid private consumption, it said.
Growth in China is likely to come in at 9.7 percent this year and 9.3 percent in 2009 — compared to 11.9 percent in 2007, the IMF said. India will grow 7.9 percent this year and slow to 6.9 percent in 2009, it said.
Editing by Tom Hals