October 10, 2008	Friday	Shawwal 10, 1429

WASHINGTON, Oct 9: The United States and other advanced economies in the world are close to or moving into recession, says the International Monetary Fund.

The IMF World Economic Outlook report blames “extraordinary financial shock and still high energy and commodity prices” for causing the current economic crisis.

The IMF and its sister organisation, the World Bank, is gathering policy makers from around the world at its headquarters on Friday to consult each other for overcoming the crisis threatening the international financial system.

Their annual meeting this week is expected to focus on the fiscal turmoil facing the world in generations and also on the near-meltdown in financial markets.

The report places Pakistan among the world’s 32 emerging economies hit hard by the crisis.

It also notes that the Pakistani currency has depreciated over a longer period, in part owing to rising cost of commodity imports and widening current account deficits.

The financial crisis would cause the world’s industrialised countries next year to experience their weakest year of growth since 1982, the report adds.

It predicts a recession in the United States, with unemployment averaging 6.9 per cent in 2009. The rate has not been that high since 1993 and is currently at 6.1 per cent.

The IMF expects the US slowdown to last years rather than months. “It will take considerable time before losses are fully recognised, banks are recapitalised, leverage is reduced and market confidence is regain,” the report warns.

IMF Chief Economist Olivier Blanchard emphasises the importance of implementing joint financial and macroeconomic policies at this point “to stem the negative momentum on multiple fronts”. On the financial side, “this implies the design of comprehensive programmes to deal with systemic problems,” while on the macroeconomic side, “this implies the use of monetary and fiscal policies to support growth and break negative feedback loops between the financial and real sectors,” he says.

IMF’s warning and reports in the US media paint a bleak picture of the world economy.

The world’s central banks launched a dramatic bid on Wednesday to contain the financial crisis, simultaneously cutting interest rates in 21 countries.

But the Washington Post noted on Thursday that “the move sent markets fluctuating as pessimism about the world economy continued to deepen”.

A related Washington Post report warns that the crisis has begun to have its impact on the US retain market as well.

“I don’t think anyone predicted a crisis of this magnitude that could not be fixed quickly,” says Bob Carbonell, chief credit officer for Bernard Sands, a retail rating and credit services agency. “If the American housewife puts the money under the mattress, we are in deep trouble.”

The Post report points out that September’s dire economic news “spooked shoppers and eroded confidence” as mall traffic in the US plunged 12 per cent.

The report warns that if this trend continues into the holiday seasons October to December it will be difficult to avoid a recession.

The IMF says the world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s. It expects world growth to slow to 3.0 per cent in 2009—0.9 percentage point lower than forecast in the July 2008.

In India, the growth rate will decline from 9.3 in 2007 to 6.9 in 2009. In China, it will reduce from 11.9 in 2007 to 9.3 in 2009.

In the United States, it will move down from 2 per cent in 2007 to 0.1 per cent in 2009.

Following sluggish growth through the remainder of 2008 and early 2009, the anticipated recovery later in 2009 will be exceptionally gradual by past standards. This is because financial conditions are expected to remain very difficult, even assuming that actions by the US and European authorities succeed in stabilizing financial conditions and in avoiding further systemic events.

“In advanced countries, the crisis is now being driven by a downward spiral of loss of confidence and trust,” Blanchard said. The effects are spreading to consumers and firms, he warns, which have so far weathered the recent price hikes in oil and commodities well but are now experiencing sharply slowing demand.

However, despite the emerging economies’ cooling momentum, they are still expected to provide a source of resilience, benefiting from strong productivity growth and improved policy frameworks. But the longer the financial crisis lasts, the more the emerging economies’ growth is likely to be affected.