The world economy will grow by only 0.5 per cent in 2009, the worst rate since World War II, as industrial nations battle a severe recession that is dragging developing countries down with them, the International Monetary Fund said Wednesday as it slashed its global economic forecasts, according to dpa. Wealthy nations will experience their worst recession in the post- war period as a financial crisis continues to spread throughout their economies. A contraction of 2 per cent is expected in 2009, even with massive fiscal stimulus packages planned by all rich countries. A recovery to 1.1 per cent is possible in 2010, the IMF said, but only with drastic government intervention to help revive demand and stabilize financial institutions at the heart of the downturn. The United States will contract by 1.6 per cent and Germany - Europe's largest economy - by 2.5 per cent in 2009. Japan, Asia's biggest economy, will contract 2.6 per cent, the IMF said. Growth in emerging and developing countries will also slow dramatically in 2009 to 3.3 per cent from 6.3 per cent in 2008. China's economy will slow to 6.7 per cent in 2009 from 9 per cent, India's will drop to 5.1 per cent and Brazil's growth will plummet a whopping 4 percentage points to 1.8 per cent in 2009. The IMF's predictions represented another sharp revision from its last forecast in November, a fact attributed to dramatic collapses in consumer and business confidence, plummeting global trade and demand, frozen credit markets and even greater losses for financial institutions. "We expect the global economy to come to a virtual standstill in 2009," Olivier Blanchard, the IMF's chief economist, told reporters. In its November update, the IMF had forecast 2.2-per-cent global growth for 2009, a contraction of 0.3 per cent in advanced economies and 5.1-per-cent growth in developing countries. World growth below 3 per cent is considered a global recession. Global trade volumes are also expected to collapse in 2009, contracting 2.8 per cent after growth of 4.1 per cent the year before. In November, the IMF still predicted a 2.1-per-cent increase in trade for this year. At the same time, the IMF warned that deflation was now becoming a serious risk for some wealthy nations. Consumer prices were expected to rise by only 0.3 per cent in industrial nations in 2009 and 0.8 per cent in 2010. The global downturn continues to be driven by the debilitating financial crisis which began with a collapse in the United States' housing market but has since spread to all corners of the globe. Financial firms are now projected to lose a total of 2.2 trillion dollars before the crisis is over - about 500 billion dollars more than banks currently have in their reserves - and will require more government aid. The IMF also expects the world's 20 largest economies to spend at least 1.5 per cent of their gross domestic product on massive fiscal stimulus packages. The US is currently mulling an 825-billion-dollar package worth some 5 per cent of GDP. Such government spending is crucial to revive consumer demand, but would only provide a relatively short-term boost to economies: Stabilizing the financial system is the key in the long run. "Restoring financial health is a necessary condition for durable economic recovery," Blanchard said, adding that governments needed to take more "aggressive" measures to stem the collapse of financial firms. Banks' need for cash has stopped them from lending to each other and to consumers. Developing countries have seen foreign investments in their economies dry up as a result. Governments, especially the US, must inject more capital into banks to keep them afloat, but should also take the damaged mortgage- related assets off their balance sheets in order to promote a long- term recovery, the IMF said. The price of commodities like oil, food and metals has also plummeted in the last few months due to falling demand, putting even more pressure on some poorer countries dependent on their exports of natural resources.
