The International Monetary Fund has dropped its economic forecast yet again, it now expects the global economy to decline by 1.3% in 2009.

In its economic outlook released Wednesday, the IMF sees this year as the worst year for global growth since the end of World War II. It currently expects growth to return in 2010, but slowly, remaining just under 2%, “still well below what we would see as normal.”

Olivier Blanchard chief economist at the IMF says that the health of the financial system remains key to the outlook. “Banks are still very much in the process of retrenching and of tightening lending standards. Many securities markets are still poorly functioning. The longer this goes on, the longer and the deeper will be the recession,” he says. “And the longer and deeper the recession, the worse will be the health of the financial system. Together, these two feedbacks create the risk of a vicious cycle, and a much worse outcome than in our baseline.”

Its basic expectation is for negative growth in advanced economies for the rest of the year. “But we see the balance shifting as the year progresses. We expect that growth in advanced countries will become positive again in 2010, and return to its normal rate around the end of 2010,” Blanchard said.

However, he stressed that this outlook spells an ugly jobs picture. “As long as growth is below normal, unemployment will continue to increase. We thus expect unemployment to crest only towards the end of 2010, and to decrease after that,” he said.

“This is not the time for complacency, and the need for strong policies, on both the macro and especially on the financial fronts, is as acute as ever,” Blanchard stressed. “But, with such policies in place, there is light at the end of this long tunnel. World growth can turn positive by the end of this year, and unemployment can start decreasing by the end of next year.”

IE