Global economy is expected to shrink this year

By JEANNINE AVERSA, AP Economics Writer Jeannine Aversa, Ap Economics Writer 1 hr 16 mins ago

WASHINGTON – The world economy is likely to shrink this year for the first time in six decades.

The International Monetary Fund projected the 1.3 percent drop in a dour forecast released Wednesday. That could leave at least 10 million more people around the world jobless, some private economists said.

"By any measure, this downturn represents by far the deepest global recession since the Great Depression," the IMF said in its latest World Economic Outlook. "All corners of the globe are being affected."

The new forecast of a decline in global economic activity for 2009 is much weaker than the 0.5 percent growth the IMF had estimated in January.

Big factors in the gloomier outlook: It's expected to take longer than previously thought to stabilize world financial markets and get credit flowing freely again to consumers and businesses. Doing so will be necessary to lift the U.S., and the global economy, out of recession.

The report comes in advance of Friday's meetings between the United States and other major economic powers, and weekend sessions of the IMF and World Bank. The talks will seek to flesh out the commitments made at a G-20 leaders summit in London last month, when President Barack Obama and the others pledged to boost financial support for the IMF and other international lending institutions by $1.1 trillion.

The IMF's outlook for the U.S. is bleaker than for the world as a whole: It predicts the U.S. economy will shrink 2.8 percent this year. That would mark the biggest such decline since 1946.

Among the major industrialized nations studied, Japan is expected to suffer the sharpest contraction this year: 6.2 percent. Russia's economy would shrink 6 percent, Germany 5.6 percent and Britain 4.1 percent. Mexico's economic activity would contract 3.7 percent and Canada's 2.5 percent.

Global powerhouse China, meanwhile, is expected to see its growth slow to 6.5 percent this year. India's growth is likely to slow to 4.5 percent.

All told, the lost output could be as high as $4 trillion this year alone, U.S. Treasury Secretary Timothy Geithner estimated.

Besides trillions in lost business, a sinking world economy means fewer trade opportunities and higher unemployment. It raises the odds more people will fall into poverty, go hungry or lose their homes. And while keeping a lid on interest rates and consumer prices, the global recession increases the risk of deflation, which would drag down prices and wages, making it harder for people to make payments on their debt.

The jobless rate in the United States is expected to average 8.9 percent this year and climb to 10.1 percent next year, the IMF said.

In Germany, the jobless rate is expected to average 9 percent this year and 10.8 percent next year. Britain's unemployment rate is projected to rise to 7.4 percent this year and to 9.2 percent next year.

Brian Bethune, economist at IHS Global Insight, estimates that at least 10 million jobs could be lost this year, mostly in the United States and Europe, because of sinking global economic activity.

He and other economists said the 1.3 percent projected decline would be the first in roughly 60 years. In a report issued in mid-March, the IMF predicted global activity would contract this year "for the first time in 60 years," though it didn't offer a precise estimate then.

Next year, the IMF predicts the world economy will grow again — but just 1.9 percent. It said this would be consistent with its findings that economic recoveries after financial crises "are significantly slower" than ordinary recoveries typically are.

All those factors tend to weigh against prospects "for a speedy turnaround," the IMF said.

In 2010, the IMF predicts the U.S. economy will be flat, neither shrinking nor growing. Germany's and Britain's economies, meanwhile, will shrink less — by 1 percent and 0.4 percent respectively — it estimates.

Others countries, such as Japan, Russia, Canada and Mexico are projected to grow again. And China and India should pick up speed.

The financial crisis erupted in the United States in August 2007 and spread around the globe. The crisis entered a tumultuous new phase last fall, shaking confidence in global financial institutions and markets. Total worldwide losses from the financial crisis from 2007 to 2010 could reach nearly $4.1 trillion, the IMF estimated in a separate report Tuesday.

The crisis has led to bank failures, wiped out Lehman Brothers and forced other big institutions, like insurance giant American International Group, to be bailed out by U.S. taxpayers.

And it's triggered radical government interventions — such as the United States' $700 billion financial bailout program and the Federal Reserve's $1.2 trillion effort to lower interest rates and spur spending.

Actions by the United States and government in other countries have helped ease the crisis in some ways. But markets are still not operating normally.

The 185-nation IMF, headquartered in Washington, is the globe's economic rescue squad, providing emergency loans to countries facing financial troubles. It has urged countries to take bolder actions to bolster banks.

The IMF also has pushed countries to work more closely together. It favors coordinating fiscal stimulus efforts through tax reductions or greater government spending to stimulate the appetites of consumers and businesses. And it warned countries to resist the temptation of enacting protectionist trade measures.

"Fiscal policies had made a gigantic difference," said IMF Chief Economist Olivier Blanchard. Without them, the hit to the global economy would have been much greater and pushed it perilously close to "a depression," he added.

Because the world economy won't be back to normal next year or perhaps even in 2011, Blanchard urged countries to spend money on big public works projects — something the Obama administration is doing — to bolster activity.

Bold policy actions could set off a mutually reinforcing "relief rally" in financial markets and a revival in consumer and business confidence, the IMF said in its report. But it remains concerned that these policies won't be enough to break the vicious cycle whereby deteriorating financial institutions feed, in turn, weaker economic conditions.

"The problem is that the longer the downturn continues to deepen, the slimmer the chances that such a strong rebound will occur, as pessimism about the outlook becomes entrenched and balance sheets are damaged further," the IMF said in the report Wednesday.

With the global economy stuck in a recession, the risks of a dangerous bout of deflation — a prolonged decline in prices that can worsen the economy — has risen. The IMF cited a "moderate" risk of deflation in the United States and in the 16 countries that use the euro. It saw a "significant likelihood of deeper price deflation" in Japan.
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