The International Monetary Fund (IMF) has drastically revised down its forecast for the global economy in its latest update on the global outlook, and has called for concerted policy actions to restore confidence, stabilise financial conditions and restore global growth.
Against a backdrop of ongoing financial distress, falling growth and sinking confidence, the IMF expects global activity will contract in 2009 for the first time since World War II.
The report underscores the seriousness of this global recession and the impacts it is having on every economy around the world.
The IMF has forecast that the global economy will contract by ½ to 1 per cent in 2009, before staging a modest recovery in 2010. This is a downward revision of 1 to 1½ percentage points from the IMF January World Economic Outlook (WEO) released only seven weeks ago, reflecting just how rapid and severe this global recession has become.
The IMF expects advanced economies will suffer deep recessions in 2009, with GDP across advanced economies now expected to fall by over 3 per cent in 2009. Emerging and developing economies are expected to grow by just 1½ to 2½ per cent in 2009, compared with growth of more than 6 per cent in 2008.
The IMF has also observed massive falls in economic activity in the final quarter of 2008, with global GDP falling by an unprecedented 5 per cent annualised.
GDP in advanced economies contracted by 7 per cent annualised, with the United States' GDP falling 6 per cent annualised and Japan's GDP falling a massive 13 per cent annualised. Many emerging economies also contracted sharply due to falling external demand, tight financial conditions and tumbling commodity prices.
Despite the revisions, downside risks continue to dominate the outlook. The main risk is a further intensification of the negative feedback loop between the real economy and the financial system.
Against the sobering backdrop of a much deeper and more protracted global recession than previously envisaged, it is inevitable that Australia's economy and Australian jobs will be affected. However, Australia is much better placed than most other advanced countries to withstand the crisis.
Our financial system is strong, our regulatory framework is working well and the Reserve Bank has cut interest rates aggressively.
Crucially, the Government has acted ahead of the curve with substantial economic stimulus to support growth and jobs in the economy and today's figures from the IMF further underscore the importance of this decisive and early action.
The IMF has said that turning around global growth will depend critically on policy actions to restore confidence, stabilise financial conditions and support growth.
Like the Rudd Government, the IMF believes that restoring confidence is vital to resolving the crisis. In particular, the IMF notes that this calls for tackling problems head‑on in the financial sector, including by dealing aggressively with distressed assets in international financial institutions. The IMF has highlighted that a coherent and internationally coordinated set of policies is urgently required to restore market confidence.
The IMF has called on fiscal policy to play a central role in supporting demand and has recommended a sustained fiscal stimulus in the order of 2 per cent of GDP for 2009 and 2010. Unfortunately many G-20 countries are currently falling short of that measure.
The Government has already acted swiftly and decisively to support jobs and growth in the face of the global recession. Australia's economic stimulus measures meet the recommendations of the IMF, providing a fiscal stimulus of around 2 per cent of GDP this fiscal year and next.
There are no quick fixes in the face of this savage global recession and its full effects are yet to be felt. But the Government is doing – and will continue to do – everything within our power to cushion Australians from the worst impacts of this severe global recession.