IMF releases portion of dire World Economic Outlook

Two out of four chapters of the IMF’s major World Economic Outlook are available — the other two are expected on April 22. 

The short of it? Bad news.

Chapter three includes a long comparison of the current Great Recession with the Great Depression of the 1920s. Ours is now a global down-turn, a "synchronized downturn," the paper argues — that makes it worse. The only available counterballast lies in coordinated, synchronized governmental spending. Nevertheless, there are worrisome parallels.

There is continued pressure on asset prices, lending remains constrained by financial sector deleveraging and widespread lack of confidence in financial intermediaries, financial shocks have affected real activity on a global scale, and inflation is decelerating rapidly and is likely to approach values close to zero in a number of countries. Moreover, declining activity is beginning to create feedback effects…

The fourth chapter takes a look at how the crisis originated in advanced economies, and spread like wildfire to emerging economies.

As the crises in advanced economies continue to deepen, and trade and capital flows decline further, exchange rates and financial systems in emerging economies could come under more severe pressure. In turn, a broad-based economic and financial collapse in emerging economies would have a significant negative impact on the portfolios of advanced economies….

In light of such cross-country spillovers, there is a strong case for a coordinated approach to a range of policies…

 So, some predictions for chapters one and two, and for the IMF in general. 

• We hear that IMF is forecasting a one-percent shrinkage in global GDP in 2009, the first shrinkage since World War II. It expects a recovery of around 1.8 percent of GDP next year, a third of that recovery due directly to governmental stimulus.

• And we hear that the IMF intends to play a much larger "macroprudential" regulatory role in the future, possibly by creating a new board with many more members from emerging markets and new voting rules.

• We’re looking for more details on the expansion of the IMF’s special drawing rights, high-access precautionary arrangement, and flexible credit line programs — the latter two will be more important than the former one, we think. The report warns strongly that simultaneous recessions require coordinated and simultaneous responses — the IMF is playing a huge role there.