KEY POINTS:
The global economy will slow close to a halt this year as more than US$2 trillion ($3.8 trillion) of bad assets from the United States help sink economies from Russia to the United Kingdom, the International Monetary Fund said.
Bank losses worldwide from toxic US-originated assets may reach US$2.2 trillion, the IMF said in a report released yesterday, more than the US$1.4 trillion that the fund predicted in October.
The IMF expects the advanced economies, which include most of New Zealand's major trading partners, to shrink by 2 per cent this year, and to claw back only half of that next year.
Even that modest recovery is contingent upon governments taking prompt and forceful action to clean up the banks and financial system more generally.
As matters stand they are still very much part of the problem and in no fit state to enable a recovery, in its view.
"Notwithstanding public injections of capital many banks around the world may have an insufficient capital cushion to weather a deep global economic downturn," the IMF said.
With further writedowns to come US and European banks would need at least US$500 billion of new capital just to prevent their capital position from deteriorating further, it said.
Governments' responses so far had been piecemeal and reactive and had not stemmed concerns about the health of the financial system. The result has been a "pernicious feedback loop" between dysfunctional financial markets and a real economy which has ground to a halt.
With growth among developing and emerging economies expected to halve, the IMF expects global growth to slow to 0.5 per cent this year - the weakest rate since the war.
World trade is forecast to shrink by nearly 3 per cent, compared with growth of 4 per cent last year and 7 per cent in 2007.
Non-fuel commodity prices are expected to fall 29 per cent.
These forecasts are sharply weaker than those the IMF published just two months ago, when it expected world growth to remain above 2 per cent this year.
US gross domestic product will contract 1.6 per cent, Japan's will shrink 2.6 per cent and the euro area will decline 2 per cent in 2009, the IMF said. The fund in November foresaw a 0.7 per cent US contraction, with declines of 0.2 per cent in Japan and 0.5 per cent in the euro zone.
Leading the Group of Seven nations in contraction this year will be the UK economy, which the IMF predicted would slide 2.8 per cent, compared with the fund's forecast in November for a 1.3 per cent drop.
Global growth this year will come to a "virtual standstill", said Olivier Blanchard, the IMF's chief economist, in a press conference in Washington. "We need stronger policy on the financial front."
The European Central Bank has cut its benchmark interest rate by more than half since early October to 2 per cent, matching a record low. Governments are also easing fiscal policy as the 16-nation euro-region suffers its worst recession since the single currency began trading a decade ago.
Advanced and developing countries need to be "even more supportive" of demand than they already have been, with lower interest rates and fiscal stimulus, the lender said. The fund urged "timely" passage of fiscal aid, saying "any delays will likely worsen growth prospects".
The Obama Administration and federal regulators are considering setting up a "bad bank" that would absorb illiquid assets from otherwise healthy financial firms.
Hedge funds may have halved in size in the last three months of 2008, the IMF said, dragged down by a combination of asset-price declines and investors withdrawing their money.
China's economy will likely expand 6.7 per cent this year, the IMF said, reducing its estimate for the world's fastest-growing major economy from 8.5 per cent in November. Russia will contract 0.7 per cent this year, compared with a 3.5 per cent expansion the IMF predicted in November.
SHRINKING WORLD
IMF forecast for economic output in 2009
* Advanced economies -2.0 per cent
* United States -1.6 per cent
* Japan -2.6 per cent
* Germany -2.5 per cent
* France -1.9 per cent
* Britain -2.8 per cent
* China 6.7 per cent
* India 5.1 per cent
* Russia -0.7 per cent
* Africa 3.4 per cent
- BLOOMBERG
