The International Monetary Fund on Thursday said that the global economy could contract by up to 1 per cent this year, the biggest contraction in 60 years, urging a powerful stimulus effort while criticising the plan offered by the US.
Calling for a co-ordinated rescue, the IMF was critical of the financial stability plan introduced by Tim Geithner, US Treasury secretary. Mr Geithner last week urged the world??s biggest industrialised countries to commit 2 per cent of their total gross domestic product during the next two years in an effort to stimulate the global economy.
Geithner said the IMF should oversee the stimulus program and increase its own capacity by $500bn to help restore growth in emerging markets.
However, the IMF argued that ??essential details are still lacking? from the plan. It said the proposal needed more clarity on how distressed financial assets should be valued and how insolvent banks will be resolved.
In its report to the G20 countries, the IMF predicted a modest recovery beginning next year if countries succeeded in stabilising the financial system and provided sufficient fiscal support. Moreover, credit conditions would need to improve, the collapsing US housing market would need to bottom and lower oil and commodity prices would need to provide an economic cushion.
The IMF called for a co-ordinated global effort to resuscitate the world economy using large stimulus packages while working to prevent deficits from running loose. It warned, however, that hopes of a recovery before the middle of next year are receding and that further recovery delays could cause the downturn to intensify.
??Turning around global growth will depend critically on more concerted policy actions to stabilise financial conditions as well as sustained strong policy support to bolster demand,? the IMF said.
Those recommendations came as the IMF said that advanced economies would suffer ??deep recessions? in 2009, with some experiencing their sharpest contractions since the second world war. In the fourth quarter of last year the world economy contracted by an annual rate of 5 per cent.
The fund said that the contraction in the US would push output to levels last seen in the early 1980s, but growth could return by the third quarter of 2010. Europe has been hit especially hard by falling demand and the collapse of housing markets in many of its countries. Japan, meanwhile, is suffering from plunging exports and business investment, weak private consumption and a damaged financial sector, according to the IMF.
Emerging economies are also feeling the ill effects of the recessions hitting advanced countries. The IMF said that some could suffer ??serious setbacks? this year as financing is constrained and commodity prices fall.
The fund said that one key to a recovery would be to restore credibility to financial institutions and political actions that eased the ??crisis of confidence? that has ensued.
