A failure by the G20 summit on 2 April to tackle the global recession will lead to an even more prolonged downturn, the International Monetary Fund warned yesterday, as it slashed its forecasts for growth.
The IMF's latest bulletin warned: "Delays in implementing comprehensive polices to stabilise financial conditions would result in a further intensification of negative feedback...leading to an even longer and deeper recession". Stimulus packages would also need to be maintained in 2010, the IMF said.
The fund also issued a stark warning that the collapse of some national economies in central and eastern Europe could still trigger another wave of banking failures.
The IMF's note, prepared for the G20, warns of a sort of domino effect running through the continent via the banking system as problems in nations such as Hungary, Romania, Bulgaria and the Baltic states knock down otherwise relatively healthy advanced economies – including those in Sweden, Austria, Switzerland, Belgium and the Netherlands.
That, in turn, could trigger a further international panic like the one seen on global stock markets last October.
The UK is among those especially exposed to further weakness in property markets, the IMF warned. "Falling home prices and rising defaults in the United States, United Kingdom and parts of the euro area are already exacerbating strains in the financial system," it said. "Mounting lay-offs would further dampen consumption and residential investment."
The Bank of England policy of "quantitative easing" is endorsed by the IMF, which is encouraging the G20 countries to adopt "unconventional measures" to unlock "key credit markets".
Differences on the timing of future stimulus packages have emerged as one of the important obstacles to a stronger international response to the crisis. Despite urging by the US and Britain, the German government and others in the EU have resisted pressure to introduce fresh packages quickly. The IMF suggests all nations implement a fiscal boost of around 2 per cent of GDP, which would create more than 19 million jobs globally.
The "bad-bank" model much talked about in recent months is also strongly endorsed by the IMF, which adds a note of urgency to the debate. "Policymakers must resolve urgently balance-sheet uncertainty by dealing aggressively with distressed assets and recapitalising viable institutions."
The IMF said that it now expects the world economy to contract for the first time since the Second World War, by between 0.5 and 1 per cent, with the advanced economies leading the charge downward: they will see a slump of around 3 to 3.5 per cent – a "deep recession". The most shocking figure is the one published for Japan – a slump of 5.8 per cent in 2009, with a further decline of 0.2 per cent in 2010.
A few days ago, the IMF said that the UK would slide by 3.8 per cent this year with a further shrinkage of 0.2 per cent in 2010. The equivalent figures for the US are -2.6 per cent and 0.2 per cent, and for the eurozone -3.2 per cent and 0.1 per cent.
The emerging and developing economies will still grow, however. The IMF concludes that "the prolonged financial crisis has battered global economic activity beyond what was previously anticipated".
The possibility that the fresh twist to the international crisis could come from eastern and central Europe is made explicitly clear by the fund. Former Communist bloc states such as Romania, Bulgaria, Estonia, Latvia, Lithuania, Hungary and Croatia have relied heavily on flows of private finance to fund their large trade deficits and investment in their fast-growing economies. That finance is now starting to evaporate, with resulting intense pressure on national currencies.
The exposure of Austrian, Swiss and other Western financial instructions to these nations could threaten their own stability, the IMF said. It added: "Emerging economies should prepare, on a contingent basis, plans to address the growing risk of large-scale corporate failures...countries should assess their preparedness for dealing with possible bank runs."