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The forecasts get gloomier

In its gloomiest evaluation yet of the economic crisis, the IMF in its recent update of the World Economic Outlook, has said the global economy will grow at just 0.5 per cent in 2009, the slowest since the Second World War. The projected rate is 1.7 percentage points lower than what the IMF had forecast in November, 2008. The reasons for the growing pessimism are as obvious as they are intractable. Financial markets remain under great stress, despite unprecedented policy m easures undertaken by governments and central banks worldwide. With the global economy taking a sharp turn for the worse, both output and trade are plummeting. If the IMF’s prognosis proves right, it would come to a virtual halt during the later part of this year. Echoing the opinions of several world bodies, governments, and central banks, the IMF has said that a sustained economic recovery will not be possible until the banking sector is restructured and credit markets are unclogged. Despite such near-unanimity on the diagnosis, ameliorative measures have necessarily to be tailored to suit the conditions that are unique to a country. Some emerging economies have more monetary and fiscal space for policy easing now than during previous crises. However, many others will have to adjust themselves to permanent adverse elements in access to external financing and terms of trade.

The severity of the crisis is such that no country will be spared. The advanced economies will witness the biggest contraction in 60 years: in the IMF’s view, the U.S. economy will shrink by 1.5 per cent, the euro zone by 2 per cent, and Japan by 2.5 per cent. Developing countries, though more resilient than before, will also suffer. During 2009, China will grow by 6.75 per cent, and India by 5 per cent, which is below the 7 per cent levels forecast by the RBI and other official bodies for 2008-09. Global recession continues to worsen with output and trade falling sharply during the last few months of 2008. Government policies have failed to dispel uncertainty, which has resulted in households and business postponing expenditures and this in turn reduced the demand for consumer and capital goods. The IMF has recommended stronger policy actions to mend the financial sector and macroeconomic measures — both monetary and fiscal — to stimulate demand. Almost all countries have pursued these policies without being able to arrest the downturn. In the circumstances, the IMF’s prescription of “a unified approach” to financial sector problems and “strengthening the fiscal framework” does not sound original but needs to be pursued by governments around the world.

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