The International Monetary Fund on Thursday forecast a prolonged, deep global recession in a crisis “nobody is escaping,” with recovery slow and difficult.
Weak capital flows to emerging economies in the downturn will hammer Eastern Europe in particular, the IMF said as it released two chapters from its twice-yearly World Economic Outlook (WEO).
“The current recession is likely to be unusually long and severe and the recovery sluggish,” the multilateral institution said.
The IMF offered no timeline for a recovery from the first global recession in six decades.
“There is some glimmer of hope that the stress is receding,” said Stephan Danninger, an IMF economist.
But he said any improvement would merely reduce “extreme levels of stress” to still “very high levels” of economic stress.
The IMF managing director, Dominique Strauss-Kahn, echoed the grim prognostications.
“2009 will almost certainly be an awful year – we expect global growth to enter deeply negative territory. This is a truly global crisis, and nobody is escaping,” he said in a speech at the National Press Club in Washington.
The IMF said its researchers looked at patterns of business cycles in 21 advanced economies from 1960 to the present.
The study found that fiscal stimulus actions seemed “particularly effective” in helping ending recessions, while monetary policy, such as tax cuts, can help shorten their duration but is less effective.
In the United States, “there is evidence of negative feedback between asset prices, credit, and investment,” it said.
In the rest of the world, “the current recessions are also highly synchronised, further dampening prospects for a normal recovery”.
The financial firestorm that began in September after the collapse of the Wall Street investment bank Lehman Brothers swept beyond advanced economies and is battering the rest of the world.
The IMF warned that the decline in capital flows to emerging economies “may be protracted, given the solvency problems facing advanced economy banks who provide significant financing to emerging economies”.
Emerging economies in Eastern Europe were especially vulnerable because of the heavy presence of Western European banks in their financial sectors and economies.
The IMF pointed out that past episodes of systemic banking stress in advanced economies, such as the Latin American debt crisis in the 1980s and the Japanese banking crisis of the 1990s, show that the decline in capital flows tends to be “sizeable and drawn out”.
“Given their large exposure, emerging European economies might be heavily affected,” said the 185-nation institution, whose mission is to promote global stability.
The Washington-based IMF highlighted the need for global coordination to battle the downturn and contain the financial meltdown.
“A coordinated policy response by advanced and emerging economies is required to prevent further escalation and spreading of financial stress,” it said.
The publication of the first two WEO chapters, which focus on recovery from recession and the spreading of financial stress from the advanced to emerging economies, came as the IMF prepares for its spring meetings with the World Bank, to be held April 25-26 in Washington.
The sober tone of the chapters appeared to signal significant downward revisions for the forthcoming WEO forecasts, due to be published next Wednesday.
In an update last month, the IMF predicted the first global contraction in 60 years, of between an annual negative rate of 0.5 per cent and 1.0 per cent in 2009.
The world economy was expected to gradually stage a “modest recovery” in 2010, with growth between 1.5 per cent and 2.5 per cent, it said.