News Room - Business/Economics

Posted on 10 Jul 2009

IMF sees weak economic recovery

It warns that global economy is not strong enough yet without heavy govt spending

 

The global economy is set to slowly pull out from its worst recession in six decades, the IMF said, and world leaders aim to help the recovery with a breakthrough in stalled trade talks.

 

The International Monetary Fund forecast a slightly steeper 1.4% global contraction in its latest outlook than in the previous April edition, but saw 2.5% growth next year, stronger than the 1.9%predicted earlier.

 

The Fund warned, however, that the world economy and the banking sector at the heart of the financial crisis were not strong enough yet to do without heavy government spending and cheap central bank funds.

 

“The recovery is coming but it is likely to be a weak recovery,” IMF chief economist Olivier Blanchard said.

 

Leaders of the Group of Eight industrial nations agreed that despite rounds of interest rate cuts and an estimated US$5 trillion in public spending, the recovery was not yet assured and that it was too early to cut off economic lifelines.

 

“All were of the view that the crisis is a long way from being over. With luck, we have reached the bottom,” German Chancellor Angela Merkel told reporters at the G8 summit in the Italian town of L’Aquila.

 

The group, made of the United States, Japan, Germany, France, Britain, Italy, Canada and Russia acknowledged in a statement there were still significant risks to financial stability.

 

Fears that high unemployment and weak consumer spending could strangle the nascent recovery made investors trim riskier bets, with the yen soaring to a five-month high against the dollar and pushing Tokyo stocks 0.5% down yesterday.

 

The yen’s spike, exacerbated by automatic stop-loss dollar sell orders, was so big that it prompted a government warning that sharp currency moves could jeopardise the world’s number two economy and hurt financial markets.

 

However, stock markets found some support in bets that the upcoming quarterly earnings reports will offer evidence that the worst of the downturn was over.

 

US aluminium giant Alcoa Inc appeared to back that view, kicking off the US earnings season after the market close with a smaller loss than analysts had expected.

 

The July 8-10 G8 summit’s focus shifted yesterday to talks on global warming and trade with major developing nations, which have complained they are suffering heavily from a crisis that was not of their making.

 

Hit by shockwaves from the crisis triggered by reckless lending practices by top Wall Street and European banks, China, India and Brazil have all suggested that the world should start seeking a new global reserve currency as an alternative to the dollar. G8 member Russia has also backed the idea.