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IMF Sharply Cuts World Growth Projections

The International Monetary Fund (IMF) sharply revised its world economic growth projections downward on Thursday, while calling for global actions to provide further fiscal stimulus.

World growth projections sharply slashed

"Prospects for global growth have deteriorated over the past month, as financial sector deleveraging has continued and producer and consumer confidence have fallen," said the IMF in its updated World Economic Outlook.

Accordingly, the world economy is projected to expand by 2.2 percent in 2009, down by some 0.75 percentage point from the projections in October.

Advanced economies are expected to contract 0.3 percent on a full-year basis next year, the first such fall since World War II.

The IMF now expects the US economy to contract 0.7 percent in2009, sharply down from its estimate of a 0.1 percent growth issued just a month ago.

"The U.S. economy will suffer, as households respond to depreciating real and financial assets and tightening financial conditions," the IMF said.

Growth in the euro area will be hard hit by tightening financial conditions and falling confidence. In Japan, the support to growth from net exports is expected to decline.

In emerging economies, growth is projected to slow appreciably but still reach 5 percent next year, higher than in earlier business cycle troughs, according to the IMF.

However, the cyclical downturn in emerging economies is of a similar magnitude to that in the advanced economies when measured relative to higher trend growth rates, in line with past cycles, warned the IMF.

"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," it said.

"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," it said.

Financial crisis remains virulent

The IMF warned the financial crisis remains virulent and the economic outlook is "exceptionally uncertain."

"Markets have entered a vicious cycle of asset deleveraging, price declines, and investor redemptions," it said. "Credit spreads spiked to distressed levels, and major equity indices dropped by about 25 percent in October."

Emerging markets came under even more severe pressure, said the IMF, noting since the beginning of October, spreads on sovereign debt doubled, returning to 2002 levels, with more than a third of the countries in the benchmark EMBIG index trading at spreads above 1,000 basis points.

"Emerging equity markets lost about a third of their value in local currency terms and more than 40 percent of their value in US dollar terms, owing to widespread currency depreciations," it said.

Market conditions are starting to respond to these policy actions, but even with their rapid implementation, financial stress is likely to be deeper and more protracted than envisaged in the October 2008 WEO, warned the IMF.

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, in part, because pressures have now broadened to emerging markets, raising recapitalization needs.

"Thus, financial conditions are likely to remain tight for a longer period and to be more impervious to policy measures than previously expected," the IMF noted.

New policy stimulus urged to cope with crisis

The IMF has called for its members to take new policy stimulus, saying "a strong macroeconomic policy response could limit the damage."

"Global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth," it said.

There is a clear need for additional macroeconomic policy stimulus relative to what has been announced thus far, to support growth and provide a context to restore health to financial sectors, said the organization.

"Room to ease monetary policy should be exploited, especially now that inflation concerns have moderated," said the IMF.

However, "monetary policy may not be enough because monetary easing may be less effective in the face of difficult financial conditions and deleveraging," it added.

These are conditions where broad-based fiscal stimulus is likely to be warranted, said the IMF, noting "fiscal stimulus can be effective if it is well targeted, supported by accommodative monetary policy, and implemented in countries that have fiscal space."

(Xinhua News Agency November 7, 2008)

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