Thursday, January 29, 2009

IMF annouces "virtual standstill" in global economy

Yesterday's press conference at the IMF, Olivier Blanchard,Economic Counsellor and Director of the Research Department, began with an acknowledgment that he is a bearer of bad news: global output and trade are decreased; growth forecasts are being revised continually downward. As far as outlook, Blanchard reported that the global economy will come to a "virtual standstill" with just 1/2% of growth for 2009. The global financial crisis has taken a toll on different economies in different ways. In terms of developed economies, investor and consumer confidence is lower, making the cost of credit higher and less available. In emerging economies, the effect is different: (1) there is weaker external demand from developed countries for goods; (2) the global credit crunch has limited credit and increased the cost of credit; and (3) there is a decline in cost of goods exported.

The IMF's solution? Simply restoring financial health. Easier said than done, it would seem. The difficulty is one that still eludes us regarding the toxic assets that are still present on the balance sheets of banks. Much is said about the fiscal policies and government stimulus efforts, with a recommendation for proposals that emphasize government spending, rather than tax relief to have the quickest effect. Of course, the long term concern is the ability for governments to reverse the deficits that are created in the near term. Thankfully, the IMF is expecting the United States to return to a low level of growth (1%) by 2010.

The full press conference is available through the IMF.


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