Dampening hopes for an early exit from the recession still gripping the global economy, the managing director of the International Monetary Fund, Dominique Strauss-Kahn, warned yesterday that "the large part of the worst is not yet behind us".
Mr Strauss-Kahn pointed to improving, but still dysfunctional, credit markets and doubts about some banks as reasons for his wariness: "The markets are not as frozen as they were one year ago, or eight months ago but they are still not functioning normally. And the recovery needs markets functioning correctly...One of the constants of [banking] crises is that you never recover before the cleansing of the balance sheets of the financial sector."
Nonetheless, the IMF has raised global growth estimates for 2010 to 2.4 per cent from 1.9 per cent, and confirmed its April forecast for a 1.3 per cent contraction in 2009. It also revealed a brighter outlook for the US. It now believes that the world's largest economy will grow by 0.75 per cent in 2010, rather than staying flat, and that it will contract by 2.5 per cent this year, rather than 2.8 per cent. The IMF gives the credit to the Obama administration's stimulus packages – "increasingly strong and comprehensive".
The IMF chief acknowledged this improvement and that many economic indicators have been pointing, albeit tentatively, towards a global upturn, but reflected the misgivings voiced by G8 finance ministers after their summit in Italy over the weekend: "Their [G8] stance is that we are beginning to see some green shoots but nevertheless we have to be cautious."
Rapidly rising unemployment is one of those risk factors, and Mr Strauss-Kahn's remarks came as figures for unemployment in the euro currency zone showed that the area lost a record 1.2 million jobs in the first quarter of this year. All of the major eurozone economies suffered employment declines in the first quarter, particularly Spain, which is seeing unemployment approach 20 per cent. The eurozone unemployment rate stands at a near decade high of 9.2 per cent.
In the UK, joblessness is also set to grow, with new numbers out tomorrow widely expected to see the jobless rate set decisively higher than when New Labour came to power in 1997. The TUC said yesterday that the number of people losing their jobs will carry on increasing until at least the autumn of next year. On the evidence of the last recession, unemployment will continue to rise for 18 months after the economy returns to growth.
Howard Archer, of Global Insight, commented: "Markedly weakening labour markets are a major threat to recovery prospects in the eurozone. Sharply higher and rising unemployment will weigh down on eurozone consumer spending, along with likely accompanying muted wage growth."
The stuttering progress of the European economy will add to the pressure on the European Central Bank to pursue a policy of quantitative easing on the sort of scale favoured by the US Fed and the Bank of England.