IMF forecasts US recession to affect globally
Billy Ahmed | Sunday, 22 June 2008
The biennial World Economic Outlook report issued recently by The International Monetary Fund (IMF) forecasts a US recession that will pull the global economy down with it.
The report, issued before the spring meetings in Washington of the IMF and World Bank, and a conference of the Group of Seven industrialized nations' finance ministers, paints a far more serious picture of the state of the world economy than those put forward by government and central bank officials in the US and Europe.
It states that financial problems that floated up last August in the US subprime mortgage market "spread quickly and unpredictably" and caused "extensive damage." It describes the resulting financial crisis as the biggest since the Great Depression.
The IMF predicts the US economy will grow by only 0.5 per cent in 2008, a decrease of 1 per cent from its previous US growth projection, made in January, and estimates the US economy will not recover in 2009, growing by only 0.6 per cent.
This is in contrast to US growth projections by the US Federal Reserve Board, which predicts that US growth with recover in the second half of this year and rise to 2.5 per cent to 3.0 per cent in 2009.
The report sees a 25 per cent chance that world economic growth could fall below 3 per cent this year and next, which it says is "equivalent to a global recession."
"Economic growth has nearly stalled," said Simon Johnson, the IMF's chief economist, at a Washington press conference.
In its report, the IMF trims its projection for growth in the eurozone countries from 1.6 per cent to 1.4 per cent this year, and predicts a further slowdown to 1.2 per cent in 2009.
Japan is expected to grow 1.4 per cent this year, down from its 2007 pace of 2.1 per cent, and see only a 1.5 per cent growth next year.
China's growth projection is slashed by 0.7 percentage point to 9.3 per cent for 2008, and India is expected to grow by 7.9 per cent, down from an earlier forecast of 8.4 per cent.
The IMF projects overall global growth for 2008 at 3.7 per cent, down from an earlier estimate of 4.2 per cent, and lower by 1.3 percentage points from the 5 per cent global growth rate in 2007.
In a separate Global Financial Stability Report, the IMF states that world banks and financial institutions face potential losses of nearly $1 trillion because of the bursting of the US housing and credit bubbles.
The report says that banks will suffer more than half of the estimated $945 billion losses, with the rest hitting insurance companies, pension funds and other investment firms.
The US has already moved in the direction of using taxpayer money to bail out the banks and investment houses. Last month, the Federal Reserve Board engineered the rescue of the investment bank Bear Stearns, guaranteeing $29 billion of its failing mortgage-backed assets as part of a takeover of the bankrupt investment house by JPMorgan Chase.
At the same time, the Fed opened its discount window to provide loans to other investment banks, the first time such a measure had been taken since the banking collapse of the 1930s.
Admitting the potentially disastrous implications of the credit collapse, Malcolm Knight, the general manager of the Bank for International Settlements, often referred to as the central bankers' central bank, told the Wall Street Journal the current turmoil is "probably the most serious financial turbulence in the advanced countries since the Second World War."
Dominque Strauss-Kahn, the IMF managing director, told a press conference that the current financial turmoil posed the greatest financial crisis since the 1930s, and called for coordinated intervention by governments around the world.
He echoed a call made by the Institute of International Finance, an association representing big banks, which said there was a "growing case" for government intervention.
Strauss-Kahn directly opened the issue of direct government bailouts of the banks with public funds, saying, "with respect to the banks, if capital buffers cannot be repaired quickly enough by the private sector, use of public money can be examined."
He dismissed claims that the credit crisis could be largely restricted to the US, saying, "The crisis is global. The so-called decoupling theory is totally misleading," He added that so-called developing countries such as China and India would be affected.
Since last August, the Fed had pumped $300 billion into the US banking system. According to an April 11 article on the Wall Street Journal web site, the Fed is considering contingency plans for expanding its ability to lend money to the banks. These include direct infusions of public funds on to the Fed's balance sheet from the US Treasury.
These emergency measures have not, however, resolved the underlying crisis of solvency in the financial system, and inter-bank loan rates remain extraordinarily high as banks demand premiums to lend to their counterparts, while their ability to extend credit is reduced by the massive losses they incur from bad bets on subprime mortgage-backed securities and other high-risk investments.
The Fed's unprecedented measures have provoked disagreement from some within the financial elite who fear an uncontrolled eruption of inflation and a full-scale crisis of the dollar.
The credit crunch is increasingly impacting the so-called "real economy," producing a spreading slowdown in economic activity, which, in turn, aggravates the financial crisis.
The Financial Stability Forum, a body representing financial ministers and regulators from around the world, presented a report to the Group of Seven financial ministers meeting calling for more disclosure and better risk management by financial institutions and a greater exchange of information between central bankers and regulators.
It recommended requiring institutions to hold more capital and keep larger cash reserves, but proposed no significant increase in government supervision of the banks.
The report is expected to be approved by the G7, but this is little more than window-dressing meant to conceal sharp divisions among the member states. While the Fed has dramatically cut its target short-term interest rate since September, bringing it down from 5.25 per cent to 2.25 per cent, the European Central Bank has held its rate steady at 4 per cent, and again this week refused to follow the Fed's lead and reduce the eurozone rate. The divergence in policy has intensified the dollar crisis, as speculators and investors shift their holdings from dollars to euros.
The US responded to the IMF economic growth report by publicly rejecting its projections for the US economy as "unduly pessimistic." US Treasury spokesmen also rejected Strauss-Kahn's call for government intervention on a global level to deal with the financial crisis.
The writer is a Tea Planter, columnist and researcher
The report, issued before the spring meetings in Washington of the IMF and World Bank, and a conference of the Group of Seven industrialized nations' finance ministers, paints a far more serious picture of the state of the world economy than those put forward by government and central bank officials in the US and Europe.
It states that financial problems that floated up last August in the US subprime mortgage market "spread quickly and unpredictably" and caused "extensive damage." It describes the resulting financial crisis as the biggest since the Great Depression.
The IMF predicts the US economy will grow by only 0.5 per cent in 2008, a decrease of 1 per cent from its previous US growth projection, made in January, and estimates the US economy will not recover in 2009, growing by only 0.6 per cent.
This is in contrast to US growth projections by the US Federal Reserve Board, which predicts that US growth with recover in the second half of this year and rise to 2.5 per cent to 3.0 per cent in 2009.
The report sees a 25 per cent chance that world economic growth could fall below 3 per cent this year and next, which it says is "equivalent to a global recession."
"Economic growth has nearly stalled," said Simon Johnson, the IMF's chief economist, at a Washington press conference.
In its report, the IMF trims its projection for growth in the eurozone countries from 1.6 per cent to 1.4 per cent this year, and predicts a further slowdown to 1.2 per cent in 2009.
Japan is expected to grow 1.4 per cent this year, down from its 2007 pace of 2.1 per cent, and see only a 1.5 per cent growth next year.
China's growth projection is slashed by 0.7 percentage point to 9.3 per cent for 2008, and India is expected to grow by 7.9 per cent, down from an earlier forecast of 8.4 per cent.
The IMF projects overall global growth for 2008 at 3.7 per cent, down from an earlier estimate of 4.2 per cent, and lower by 1.3 percentage points from the 5 per cent global growth rate in 2007.
In a separate Global Financial Stability Report, the IMF states that world banks and financial institutions face potential losses of nearly $1 trillion because of the bursting of the US housing and credit bubbles.
The report says that banks will suffer more than half of the estimated $945 billion losses, with the rest hitting insurance companies, pension funds and other investment firms.
The US has already moved in the direction of using taxpayer money to bail out the banks and investment houses. Last month, the Federal Reserve Board engineered the rescue of the investment bank Bear Stearns, guaranteeing $29 billion of its failing mortgage-backed assets as part of a takeover of the bankrupt investment house by JPMorgan Chase.
At the same time, the Fed opened its discount window to provide loans to other investment banks, the first time such a measure had been taken since the banking collapse of the 1930s.
Admitting the potentially disastrous implications of the credit collapse, Malcolm Knight, the general manager of the Bank for International Settlements, often referred to as the central bankers' central bank, told the Wall Street Journal the current turmoil is "probably the most serious financial turbulence in the advanced countries since the Second World War."
Dominque Strauss-Kahn, the IMF managing director, told a press conference that the current financial turmoil posed the greatest financial crisis since the 1930s, and called for coordinated intervention by governments around the world.
He echoed a call made by the Institute of International Finance, an association representing big banks, which said there was a "growing case" for government intervention.
Strauss-Kahn directly opened the issue of direct government bailouts of the banks with public funds, saying, "with respect to the banks, if capital buffers cannot be repaired quickly enough by the private sector, use of public money can be examined."
He dismissed claims that the credit crisis could be largely restricted to the US, saying, "The crisis is global. The so-called decoupling theory is totally misleading," He added that so-called developing countries such as China and India would be affected.
Since last August, the Fed had pumped $300 billion into the US banking system. According to an April 11 article on the Wall Street Journal web site, the Fed is considering contingency plans for expanding its ability to lend money to the banks. These include direct infusions of public funds on to the Fed's balance sheet from the US Treasury.
These emergency measures have not, however, resolved the underlying crisis of solvency in the financial system, and inter-bank loan rates remain extraordinarily high as banks demand premiums to lend to their counterparts, while their ability to extend credit is reduced by the massive losses they incur from bad bets on subprime mortgage-backed securities and other high-risk investments.
The Fed's unprecedented measures have provoked disagreement from some within the financial elite who fear an uncontrolled eruption of inflation and a full-scale crisis of the dollar.
The credit crunch is increasingly impacting the so-called "real economy," producing a spreading slowdown in economic activity, which, in turn, aggravates the financial crisis.
The Financial Stability Forum, a body representing financial ministers and regulators from around the world, presented a report to the Group of Seven financial ministers meeting calling for more disclosure and better risk management by financial institutions and a greater exchange of information between central bankers and regulators.
It recommended requiring institutions to hold more capital and keep larger cash reserves, but proposed no significant increase in government supervision of the banks.
The report is expected to be approved by the G7, but this is little more than window-dressing meant to conceal sharp divisions among the member states. While the Fed has dramatically cut its target short-term interest rate since September, bringing it down from 5.25 per cent to 2.25 per cent, the European Central Bank has held its rate steady at 4 per cent, and again this week refused to follow the Fed's lead and reduce the eurozone rate. The divergence in policy has intensified the dollar crisis, as speculators and investors shift their holdings from dollars to euros.
The US responded to the IMF economic growth report by publicly rejecting its projections for the US economy as "unduly pessimistic." US Treasury spokesmen also rejected Strauss-Kahn's call for government intervention on a global level to deal with the financial crisis.
The writer is a Tea Planter, columnist and researcher