The International Monetary Fund’s economic outlook has declined even further. It now forecasts global growth of just 2.2% in 2009.

“Prospects for global growth have deteriorated over the past month, as financial sector deleveraging has continued and producer and consumer confidence have fallen,” it says, in cutting its projection for world output by 75 basis points from its October outlook.

“In advanced economies, output is forecast to contract on a full-year basis in 2009, the first such fall in the post-war period. In emerging economies, growth is projected to slow appreciably but still reach 5% in 2009,” it says.

The IMF says these forecasts are based on current policies, adding that, “Global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth.”

World growth is projected to slow from 5% in 2007 to 3.75% in 2008 and to just over 2% in 2009, with the downturn led by advanced economies. Activity in the advanced economies is now expected to contract by 0.25% on an annual basis in 2009, down 75 bps from the October projections. This would be the first annual contraction during the postwar period, although the downturn is broadly comparable in magnitude to those that occurred in 1975 and 1982, it says. A recovery is projected to begin late in 2009.

The combination of stabilizing commodity prices and increasing economic slack will help to contain inflation pressures, the IMF says. “In the advanced economies, headline inflation should decline to below 1.5% by the end of 2009. In emerging economies, inflation is also expected to moderate, albeit more gradually. However, in a number of these countries, inflation risks are still manifest, as higher commodity prices and continued pressure on local supply conditions have affected wage demands and inflation expectations,” it says.

The financial crisis remains virulent, it notes. “Comprehensive policy actions are being implemented to address the root causes of financial stress and to support demand, but it will take time to reap their full benefits,” it says. “Market conditions are starting to respond to these policy actions, but even with their rapid implementation, financial stress is likely to be deeper and more protracted than envisaged in the October outlook.”

“Financial conditions continue to present serious downside risks,” it warns. “The forceful policy responses in many countries have contained the risks of a systemic financial meltdown. Nonetheless, there are many reasons to remain concerned about the potential impact on activity of the financial crisis. The process of deleveraging could be more intense and protracted than factored into these projections. Intense deleveraging could also increase the risks of substantial capital flow reversals and disorderly exchange rate depreciations for many emerging economies. Another downside risk relates to growing risks for deflationary conditions in advanced economies, although these are still small, given well-anchored inflation expectations.”

“There is a clear need for additional macroeconomic policy stimulus relative to what has been announced thus far, to support growth and provide a context to restore health to financial sectors. Room to ease monetary policy should be exploited, especially now that inflation concerns have moderated,” the IMF counsels. “However, monetary policy may not be enough because monetary easing may be less effective in the face of difficult financial conditions and deleveraging. Also, is some cases room for further easing is limited as policy rates are already close to the zero bound.”

“These are conditions where broad-based fiscal stimulus is likely to be warranted. Fiscal stimulus can be effective if it is well targeted, supported by accommodative monetary policy, and implemented in countries that have fiscal space,” it adds.

Financial policies could be reinforced, clarified, and better coordinated and thereby foster a more rapid recovery of lending and demand, it counsels. “Depending on how much prospects worsen, the scale of current recapitalization efforts may need to be broadened. Furthermore, the coverage and legal foundation for the various guarantees as well as the asset purchase programs should be clearly specified, while central bank liquidity support should continue to be generously provided. In addition, there may be a need in some countries for measures to foster an efficient and predictable resolution of mounting debt problems in the corporate and household sectors, which would help preserve value to bank creditors,” it says.

@page_break@“Crucially, there must be better cross-border consistency of policies. A key task will be to develop cooperative arrangements for the resolution of large cross-border institutions where none currently exist, given the limitations of individual country frameworks. Moreover, the extension of financial support and guarantees must consider potential cross-border effects, including for emerging economies. Finally, exit strategies for the public sector from financial system ownership need to be developed,” it says.

IE