Page last updated at 16:29 GMT, Wednesday, 28 January 2009

World growth 'worst for 60 years'

Japanese stock market trader
Developed economies such as Japan, the US and UK are in recession

World economic growth is set to fall to just 0.5% this year, its lowest rate since World War II, warns the International Monetary Fund (IMF).

In October, the IMF had predicted world output would increase by 2.2% in 2009.

It now projects the UK, which recently entered recession, will see its economy shrink by 2.8% next year, the worst contraction among advanced nations.

The IMF says financial markets remain under stress and the global economy has taken a "sharp turn for the worse".

In another gloomy view of the UK economy, the Institute for Fiscal Studies (IFS) said Britain would be saddled with government debt for more than 20 years.

IFS director Robert Chote warned that spending would have to be cut or taxes raised by more than planned to allow public finances to recover.

The predictions came as Pascal Lamy, the director general of the World Trade Organization, urged countries not to react to the global economic crisis by resorting to protectionism.

Speaking from the World Economic Forum in Davos, Mr Lamy said such a move would be "a big mistake".

'Virtual halt'

According to the IMF, the outcome of the economic slowdown has been to send global output and trade plummeting.

The current projection is a protracted recession and we have not reached the bottom yet
Justin Yifu Lin, World Bank

"We now expect the global economy to come to a virtual halt," said IMF chief economist Olivier Blanchard in a statement.

The IMF says that despite a number of policy moves, which have been carried out by many states, financial strains remain.

International co-operation is needed now to draw up new policy initiatives, and for capital injections to support "viable financial institutions".

Meanwhile, it predicts that the eurozone economy is poised to shrink by 2.0% in 2009 and the US economy by 1.6%.

Banking crisis

The report comes on the same day the International Labour Organization said that as many as 51 million jobs worldwide could be lost this year because of the global economic crisis.

It had been hoped that growth in developing nations would continue at a steady pace and help offset the recession in developed nations such as the US and UK.

The BBC's Greg Wood: "The recession will also last longer than expected"

But the seemingly endless crisis in the banking system has put paid to that notion.

Countries such as China are now struggling with a collapse in demand from their primary export markets.

Meanwhile, developed economies such as Japan, Spain, the US and UK are in recession, with new job losses being announced on a daily basis.

'Uncertainty'

The IMF says that growth in emerging and developing economies is expected to slow sharply, from 6.25% in 2008 to 3.25% in 2009.

It cites the main reasons for the drop as being falling export demand, lower commodity prices and much tighter external financing constraints.

If the recession deepens in 2009, as many forecasters expect, the global jobs crisis will worsen sharply
International Labour Organization

The IMF points out that policy efforts to tackle the downturn so far - such as liquidity support, deposit insurance and recapitalisation - have been drawn up to address the immediate threats to financial stability.

However, it says that these emergency measures "have done little to resolve the uncertainty about the long-term solvency of financial institutions".

"The process of loss recognition and restructuring of bad loans is still incomplete," says the IMF's World Economic Outlook Update.

'Bad bank'

The IMF says future co-ordinated financial policies should concentrate on recognising the scale of financial institutions' losses and on providing public support to those institutions that are viable.

"Such policies should be supported by measures to resolve insolvent banks and set up public agencies to dispose of the bad debts, including possibly through a 'bad bank' approach, while safeguarding public resources."

The IMF says the global economy is projected to experience a gradual recovery in 2010, with growth picking up to 3%.

"However, the outlook is highly uncertain, and the timing and pace of the recovery depend critically on strong policy actions," it warns.

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