The International Monetary Fund is predicting that world economic growth will see a major slowdown amid the global financial crisis.

“The world economy is decelerating quickly — buffeted by an extraordinary financial shock and by still-high energy and commodity prices — and many advanced economies are close to or moving into recession”, the IMF says. It calls the financial market shock “the most dangerous… in mature financial markets since the 1930s”.

It now expects world growth to slow to 3% in 2009 — 0.9 percentage point lower than the IMF’s forecast in July. On an annual basis, global growth is expected to moderate from 5% in 2007 to 3.9% in 2008 and 3% in 2009.

Following sluggish growth through the remainder of 2008 and early 2009, the anticipated recovery later in 2009 will be exceptionally gradual by past standards, it adds. “This is because financial conditions are expected to remain very difficult, even assuming that actions by the U.S. and European authorities succeed in stabilizing financial conditions and in avoiding further systemic events,” it explains.

IMF chief economist Olivier Blanchard emphasized the importance of implementing joint financial and macroeconomic policies at this point “to stem the negative momentum on multiple fronts.” On the financial side, “this implies the design of comprehensive programs to deal with systemic problems,” while on the macroeconomic side, “this implies the use of monetary and fiscal policies to support growth and break negative feedback loops between the financial and real sectors,” he says.

“With the right macro and financial policies—and these policies are available—we can ride the storm, and expect a recovery to start in the course of 2009,” he adds.

“In advanced countries, the crisis is now being driven by a downward spiral of loss of confidence and trust,” Blanchard says. The effects are spreading to consumers and firms, he warned, which had so far weathered the recent price hikes in oil and commodities well but were now experiencing sharply slowing demand.

In terms of inflation, the combination of rising economic slack and stabilizing commodity prices is expected to contain the pace of price increases in advanced economies. But in many emerging and developing economies, inflation is projected to remain elevated through the end of 2008 as recent commodity price increases continue to feed through to consumers, before easing somewhat by the end of 2009, the IMF notes.

The report says that commodity prices are remaining elevated primarily by the tightness of demand-supply balances for many key products and the realization that markets are likely to remain tight for the foreseeable future, after many years of ample spare capacity.

The latest report sees the principal downside risk to growth from two related financial concerns: persistent financial stress and the credit constraints from deleveraging, which could be deeper and more protracted than in the baseline scenario; and the U.S. housing market deterioration, which could be deeper than forecast, while European housing markets could weaken more broadly than envisaged in the baseline.

It warns that a failure to restore confidence in the global financial system through internationally coherent and decisive policy measures could lead to an increasingly disorderly unwinding of leverage. “In this exceptionally uncertain situation, there are substantial downside risks to the baseline outlook. In addition to concerns related to protracted financial stress and the deteriorating U.S. housing market, potential disruptions to capital flows to emerging economies and the risks of rising protectionism represent additional risks to the recovery. Inflation risks to growth are, however, now more balanced because commodity prices have retreated in response to slowing global growth,” it says.