IMF in 'severe downturn' warning

The economic downturn in many countries is likely to worsen as the financial crisis continues, the International Monetary Fund (IMF) has warned.

The global economy is now showing signs of a marked slowdown in growth, said the IMF in its latest global financial stability report.

In its study it said coherent and decisive policy measures were now needed to restore financial confidence.

The IMF report comes before this week's IMF-World Bank meeting in the US.

In the report the IMF also warned that the turmoil so far largely confined to the financial sector was likely to spread.

It estimated financial losses from the credit crisis would total $1.4 trillion, up from an earlier estimate of $1 trillion.

Credit crisis

It said problems in the money markets were now more likely to be associated with "severe and protracted economic downturns" in the rest of the economy.

"Internationally coherent and decisive policy measures will be required to restore confidence "

IMF

IMF economists said that such downturns are more likely after a rapid expansion in borrowing, and rising house prices.

This week's annual IMF-World Bank meeting, which will bring together finance ministers and economic experts from around the world, has taken on special significance because of the global credit crisis.

The worldwide economy has been hit by high commodity prices, the housing slump and the growing financial crisis.

In its report, the IMF urged governments to co-ordinate their actions.

"Internationally coherent and decisive policy measures will be required to restore confidence in the global financial system," it said.

"Failure to do so could usher in a period which is increasingly disorderly and costly for the real economy."

Inflation risk

The IMF said it has been some of the world's more sophisticated economies, like the US, which have been the worst-affected.

This has been because those countries which had bigger financial sectors, also had higher levels of borrowing.

This has heightened the impact of the consequent credit squeeze.

Yet despite its predictions of a more protracted global economic slowdown, the IMF says that there is still the risk of inflation.

It said that despite recent price falls, global raw material prices would remain high and volatile.

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