IMF forecasts long, severe global recession

The International Monetary Fund forecast a prolonged, deep global recession and offered no timeline for a recovery. The institution also predicted weak capital flows to emerging economies that would hammer Eastern Europe.


AFP - The International Monetary Fund on Thursday forecast a prolonged, deep global recession, a "sluggish" recovery, and weak capital flows to emerging economies that would hammer Eastern Europe.

"The current recession is likely to be unusually long and severe and the recovery sluggish," the IMF said in releasing two chapters from its twice-yearly World Economic Outlook (WEO).

The multilateral institution offered no timeline for a recovery from the first global recession in six decades.

The IMF also warned that "the decline in capital flows to emerging economies ... may be protracted, given the solvency problems facing advanced economy banks who provide significant financing to emerging economies."

Emerging economies in Eastern Europe were particularly vulnerable because of the heavy presence of Western European banks in their financial sectors and economies.

The IMF pointed out that past episodes of systemic banking stress in advanced economies, such as the Latin American debt crisis in the 1980s and the Japanese banking crisis of the 1990s, shows that the decline in capital flows tends to be "sizeable and drawn out."

"Given their large exposure, emerging European economies might be heavily affected," said the 185-nation institution, whose mission is to promote global stability.

The IMF said its researchers looked at patterns of business cycles in 21 advanced economies from 1960 to the present.

The study found that fiscal stimulus actions seemed "particularly effective" in helping ending recessions, while monetary policy, such as tax cuts, can help shorten their duration but is less effective.

The Washington-based IMF highlighted the need for global coordination to battle the downturn and contain the financial meltdown.

"A coordinated policy response by advanced and emerging economies is required to prevent further escalation and spreading of financial stress," it said.

"Reducing individual country vulnerabilities cannot insulate emerging economies from a major financial shock in advanced economies."

The publication of the first two WEO chapters, which focus on recovery from recession and the spreading of financial stress from the advanced to emerging economies, came as the IMF prepares for its spring meetings with the World Bank, to be held April 25-26 in Washington.

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