Tougher steps needed to spur recovery: IMF

Tougher steps needed to spur recovery: IMF
The Financial Express, April 23, 2009, Page 1

Economy Bureau, New Delhi

Notwithstanding determined and concerted policy action by central banks and governments around the world, global GDP is now projected to decline by 1.3% in 2009, according to the World Economic Outlook of the International Monetary Fund. A January update had projected more optimistic 0.5% growth. However, the report now expects the downtrend to bottom out only by the end of this calendar year, although unemployment will take longer to turn around.

The report, released on Wednesday, expects growth to recover by 2010 to a positive 1.9%. “World growth can turn positive by the end of this year, and unemployment can start decreasing by the end of next year,” said IMF chief economist Olivier Blanchard.

Projections show that India’s growth will slip to 4.5% in calendar 2009 and recover to 6.5% next year. China will see expansion dropping sharply 6.5% this year and then rebounding to 7.5% in 2010. On Tuesday, the annual policy statement issued by RBI forecast India’s GDP growth in 2009-10 at 6%. Speaking to FE recently, HDFC chairman Deepak Parekh said the IMF projections are “unacceptably low”.

The forecast by IMF remains especially bleak for advanced economies, where output is projected to contract by 3.8% in 2009, against 0.9% growth in 2008. Rates will stabilise at near zero only in 2010, it said. Worst hit in 2009 will be Japan (6.2%), Germany (5.6%), Italy (4.4%), France (3%) and the US (2.8%). This means sectors that depend on exports to Europe and the US can expect very little recovery this year.

The IMF has cautioned that economies would need wide-ranging efforts to deal with the financial strains. In emerging economies, the corporate sector is at considerable risk, the report says. It therefore suggested direct government support for corporate borrowing. India, for instance, has extended sops to exporters for their bank debt. The report says measures to help trade finance through various facilities would keep trade flowing and limit damage to the real economy.

The report notes that though India is less exposed to the decline in global demand as, compared to China, the economy has been hit by difficult external financing for both firms and banks. India’s slowdown is primarily due to weaker investment reflecting tighter financing conditions and a turn in the domestic credit cycle. Pointing out that policy rates remain high in real terms, the IMF argues that further rate cuts would help bolster credit growth. But India’s room to manoeuvre on the fiscal front is limited because of large debts.

However, a significant gain for India would be the steady deceleration in consumer price increases, from 8.3% in 2008 to 6.3% in 2009 and further to 4% in 2010.

However, the current account deficit will remain on the high side, moving from 2.8% of GDP in 2008 to 2.5% in 2009 and then to 2.6% in 2010.

Despite India and China, aggregate growth in emerging and developing economies will slip from 6.1% in 2008 to 1.6% in 2009 then recover to 4% by 2010. But the IMF has acknowledged that these are still solid rates of growth. It says China is better placed, as there were some signs of a turnaround in the first quarter of 2009. Among major developing countries, the worst affected would be Russia and Brazil, with their output shrinking by 6% and 1.3%, respectively in 2009.

The World Economic Outlook’s dismal projections are based on the assumption that financial market stabilisation will take longer than previously envisaged, even with strong efforts by policymakers. Thus, financial strains in the mature markets are projected to remain heavy until well into 2010, improving only slowly as greater clarity over losses on bad assets and injections of public capital reduce insolvency concerns, lower counter-party risks and market volatility, and restore more liquid market conditions.

Fiscal deficits are expected to widen sharply in both advanced and emerging economies, as governments are assumed to implement fiscal stimulus plans in G20 countries amounting to 2% of GDP in 2009 and 1.5% of GDP in 2010. The projections also assume that commodity prices remain close to current levels in 2009 and rise only modestly in 2010, consistent with forward market pricing