The world economy is heading for its worst slump since the second world war, according to updated forecasts from the International Monetary Fund.

That’s a forecast that will put enormous pressure on the Rudd Government’s projections that we will avoid recession next year with growth falling to a low of 2%.

But the IMF remains confident China will still have 8% plus growth in 2009, which is 0.8% lower than the forecast a month ago. 2008 growth will fall 0.1% to 9.7%.

Figures for Australia were not broken out, but we were lumped in with “Other Advanced Economies”; our growth is expected to drop from 2.9% this year to 1.5% next year.

The IMF now sees rich countries like the US, Europe and the UK suffering the first contraction in growth since the way: their economies are now projected to shrink by 0.3% next year: a shock revision of a growth projection made a month ago by the Fund for growth of 0.50%.

Growth for the entire world is now forecast to be 2.2%, down 0.8% from the figure in the World Economic Outlook issued a month ago and it will be still Asia, led by China and then India, that keeps it in the black.

“In advanced economies, output is forecast to contract on a full-year basis in 2009, the first such fall in the post-war period. In emerging economies, growth is projected to slow appreciably but still reach 5 percent in 2009. However, these forecasts are based on current policies,” the IMF said.

In an update of its world forecast for a meeting of the Group of Twenty nations next week in Washington, the IMF said that global growth would lower because:

Markets have entered a vicious cycle of asset deleveraging, price declines, and investor redemptions,” the IMF said.

In the face of worsening financial and economic conditions, markets are pricing in expectations of much higher corporate default rates, as well as higher losses on securities and loans… Thus, financial conditions are likely to remain tight for a longer period and to be more impervious to policy measures than previously expected.

Olivier Blanchard, the IMF’s chief economist, supported the overnight interest rate cuts by the Bank of England and the European Central Bank overnight and called for them to complemented by fiscal measures. The ECB cut rates by a modest 0.50% to 3.25%, but the Bank of England hacked its key rate by a record 1.5% to 3%. The Swiss central bank then chipped in with a rate cut of own of 0.50%.

The UK rate is the lowest since 1954.

“Global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth,” the IMF said in its statement.

The ECB head, Jean Claude Trichet was quoted by news agencies as saying: “I don’t exclude that we will decrease rates again.” He told a press conference after the rate cut that continuing financial turmoil will hurt global growth “for a rather protracted period.”

The reason for the big hack by the bank of England is easy to see: The IMF sees the UK economy contracting by a nasty 1.3% next year. The US will contract by 0.7%, Europe by 0.5% and Japan by 0.2%.

Today’s rate cuts follow a wave of similar moves last week around the world from the US to Australia and China, plus Japan.

While growth in emerging economies (which we supply) will be around 5% (and 8.5% in China, down from 9.3% a month ago), the IMF was gloomy on commodities.

Downward revisions vary considerably across regions. Among the most affected are commodity exporters, given that commodity price projections have been marked down sharply, and countries with acute external financing and liquidity problems.

Countries in East Asia-including China-generally have suffered smaller markdowns, because their financial situations are typically more robust, they have benefited from improved terms of trade from falling commodity prices, and they have already initiated a shift toward macroeconomic policy easing.

Weakening global demand is depressing commodity prices.

Meanwhile, commodity prices fell for a second day, with oil, grains, all metals and gold lower. Shares were also lower as markets seemingly fulfilled the gloom in the IMF forecasts, and the reasons for the huge rate cuts in Europe.

Shares around the world slid again overnight, with stocks in Germany, France and the U.K. falling about 3%, and Japan plummeting more than 6%. Wall street fell by more than 4% and the Dow is down 928 points in the two days since the US elections.

Peter Fray

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