The IMF is likely to cut its global growth forecast next month as the worldwide economic downturn deepens, the institution’s deputy chief said on Wednesday.
First deputy managing director John Lipsky said the IMF’s prediction last month of 2.2 percent growth next year was probably too high, as the financial sector has continued to unravel and the world economy has plunged further toward recession.
Global growth of less than 3 percent is considered a worldwide recession. The World Bank, the IMF’s sister organization, said on Monday it expected global growth to fall to 0.9 percent next year.
“Based on recent developments, it seems likely that we will further mark down our forecasts for global growth,” Lipsky said in a video message to a Frankfurt financial forum.
Industrial nation economies, most of which are already in a recession, are forecast to shrink as a group early next year for the first time since World War II.
Lipsky said the IMF still expected a “gradual recovery to begin before the end of 2009.”
Meanwhile, IMF chief Dominique Strauss-Kahn again urged governments on Wednesday to use spending, rather than interest rate cuts, to battle the global financial crisis.
“Countries with the strongest fiscal policy frameworks, those best able to finance new fiscal efforts, and those with clearly sustainable debt positions, should take the lead in supporting global demand,” Strauss-Kahn said in a speech in Kingston, Jamaica.
“With inflation receding, central banks in advanced and emerging market countries have also taken steps to ease monetary policy,” he said, according to the prepared text.
But “lower interest rates may not necessarily act as an accelerator, the way higher rates act as a brake” on economic activity, he said.
The IMF managing director explained that “when the real economy has stalled, loosening monetary policy does not remove the uncertainty that firms face regarding their investment decisions.”
“Further, banks in normal times perform the function of intermediating between savers and borrowers. As banks have suffered extensive losses and are primarily focused on repairing their balance sheets, the channel through which monetary policy normally works has now been severely impaired,” he said.