(EnergyAsia, October 10, Friday) — The International Monetary Fund (IMF) said the world economy is experiencing a major downturn in the face of the most dangerous financial shock in mature markets since the 1930s, and called for strong and coordinated actions to avoid worse-case scenarios.

In its latest World Economic Outlook (WEO), the agency projects global growth to slow substantially in the latter part of 2008, before beginning a modest recovery in the second half of 2009. Growth in advanced countries will be close to zero until at least the middle of 2009, while growth in emerging and developing countries will slow to substantially lower rates than in the recent past. The WEO projects global growth at around 3% in 2009.

“The world economy has entered a major downturn after being hit by two very large shocks: a surge in oil and commodity prices and the expanding financial crisis,” said Olivier Blanchard, the IMF’s Economic Counsellor and Director of Research.

“The financial crisis has clearly gotten worse, and no country will be fully immune from the effects on the real economy. It is too late to avoid a slowdown, but strong and coordinated policies can avoid even worse scenarios. In many countries, plans are already being put in place to help resolve the crisis.”

The recovery measures include both financial and macroeconomic policies, Mr. Blanchard said.

“While uncertainty remains, we are hopeful that these measures will contain the crisis and return trust to the markets,” he said. “Restored trust should result in credit coming back—although it will come back only slowly.”

He said in the short run, systemic financial actions—from the provision of liquidity to the purchase of assets to the injection of capital, are key to restoring stability and confidence in financial markets, while monetary and fiscal policies in many countries can help soften the effects of decreasing demand and break the negative feedback loop between the financial sector and the real economy.

“With such policies in place, it is reasonable to expect recovery to start in 2009 and gather strength in 2010,” Mr Blanchard said.

The WEO projects global growth year on year will slow sharply to 3.9% in 2008 from 5% in 2007, and continue slowing to 3% in 2009 (see Annex for 2008-2009 forecasts).

“The advanced economies are close to recession, and the recovery in 2009 will be exceptionally gradual by past standards,” he said.

The US economy is slowing after a relatively strong second quarter, as support from fiscal stimulus has ebbed and the impact of the US credit crisis is intensifying, according to the WEO, which estimates the US will record year-on-year growth of 1.6% in 2008 and 0.1% in 2009 against 2% in 2007.

A turnaround in the housing sector, and more stable oil prices, would help lay the basis for incipient recovery in the course of 2009, but the revival is expected to be much more gradual than in most previous economic cycles, as tight credit conditions continue to weigh heavily on domestic demand.

Most other advanced economies are also expected to go through a period of extremely sluggish growth, or even contraction, and experience only a modest upturn in 2009. The WEO projects advanced countries in aggregate will slow to 1.5% year-on-year in 2008 from 2.6% in 2007, and ease further to 0.5% in 2009.

The IMF projects growth in emerging and developing economies will continue decelerating, falling somewhat below trend during the second half of 2008 to year-on-year growth of 6.9%, down from 8% in 2007. Growth will moderate further to 6.1% in 2009.

Inflation in the advanced economies is expected to be contained by a combination of increasing slack and the stabilisation of commodity prices, and could recede below 2% by the end of 2009. In emerging and developing economies, inflation is projected to remain around 8% at the end of 2008, before easing to around 6.5% in 2009.

“Policymakers around the world are facing the daunting task of stabilising financial conditions while nursing their economies through a period of slower growth and higher inflation,” Mr Blanchard said, adding that financial markets and institutions must be placed on a healthier footing, and supply-demand responses in commodity markets must be strengthened.