Slump likely to be long and recovery slow: IMF

WASHINGTON: - The current global recession is likely to be unusually long and severe and the recovery sluggish because it sprang from a financial crisis, the International Monetary Fund (IMF) said yesterday.

New IMF analysis shows recessions tied to a financial crisis, like the current one that has its roots in reckless lending for the US housing market, are harder to shake because they are often held back by weak demand.

Worse still is that today's recession combines a financial crisis at the heart of the United States, the world's largest economy, with a broader global downturn, making it unique.

'The analysis suggested that the combination of financial crisis and a globally synchronised downturn is likely to result in an unusually severe and long-lasting recession,' the IMF said in chapters of its World Economic Outlook, which is to be released in full next Wednesday.

The IMF offered no timeline for a recovery from the first global recession in six decades. It said counter-cyclical policies can help shorten recessions but their impact is limited in the presence of a financial crisis.

Fiscal stimulus can be particularly effective in shortening the life of a recession though not appropriate for countries with high debt levels, it added.

In its most recent forecast, the IMF said the world economy will shrink this year by between 0.5 per cent and 1 per cent, the largest contraction since the Great Depression.

With advanced economies all in recession and growth in emerging market economies slowing abruptly, the IMF has urged countries to move quickly to clean up their financial sectors, in particular removing toxic assets from bank balance sheets.

Turning to emerging economies, the IMF said the current level of financial stress in these countries has already hit peaks seen during the 1997-98 crisis.

Using a new financial stress index, the IMF said current stress levels in advanced economies suggest capital flows to emerging economies, especially flows related to banking, will decline sharply and will recover slowly.

The latest reading from February this year shows that the steepest decline - an annual contraction of 17.6 per cent - was recorded in central and eastern Europe, the region hardest hit by the crisis.

REUTERS, AGENCE FRANCE-PRESSE

Source: Straits Times, 17 April 2009