The IMF has again readjusted its global growth forecast due to rising financial sector deleveraging and dwindling producer and consumer confidence. World output growth forecast is scaled down by around 0.75 percentage point to 2.2 percent in 2009 (from 5% in 2007 to 3.75% in 2008 to 2.2% in 2009…this could go even down!). Both the advanced and emerging and developing economies are expected to further slow down. Worse, in advanced economies output is forecast to contract on a full-year basis in 2009, the first such fall in the post-war period, according to the IMF. It warns that the final outcome is highly uncertain and could much more worse than expected.
Rather than relating the magnitude of this crisis to the Great Depression, the World Economic Outlook Update from the IMF states that the current and expected contraction is “broadly comparable” in magnitude to those that occurred in 1975 and 1982.
Who will suffer the most? According to the WEO update, commodity exporters (because commodity price projects have been marked down), countries with acute external financing and liquidity problems.
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.
It also hints the ineffectiveness of monetary policy as interest rates are already close to zero. What’s next? Keynesianism…and fiscal stimulus!
…However, monetary policy may not be enough because monetary easing may be less effective in the face of difficult financial conditions and deleveraging. Also, in some cases room for further easing is limited as policy rates are already close to zero bound. There are condition where broad-based fiscal stimulus is likely to be warranted. Fiscal stimulus can be effective if it is well targeted, supported by accommodative monetary policy, and implemented in countries that have fiscal space.
In Sub-Saharan Africa output is expected to decrease by 0.6% in 2008 and 1.2% in 2009.