The global economy likely will contract next year for the first time in decades in a “severe” recession as the credit crunch bites, an international banking group said on Thursday.
The Institute of International Finance (IIF), the Washington-based association representing more than 375 of the world’s major banks and financial institutions, projected the world economy would shrink 0.4 percent next year after 2.0 percent growth this year.
Charles Dallara, the managing director of the IIF, called it “the most severe, globally synchronized recession in modern economic history.”
The global crisis requires a global coordinated response, he said at a news conference.
Dallara said the economy was mired in a negative feedback loop of weakening economic activity and intense financial market strains.
“You’ll see much more bang for the buck” with a coordinated response, he said, hailing US government monetary and fiscal efforts to unblock credit and stimulate growth.
“It will be important that these measures be complemented in Europe and in Japan,” he said.
In a grim assessment, the IIF said in its monthly Global Economic Monitor report: “It should be emphasized that an overall contraction in the global economy is a truly weak outcome, and the first time this has happened in the post-1960 period.”
Philip Suttle, the IIF macroeconomic analysis director, said that data as far back as the early 1950s do not show a contraction in the world economy.
Mature economies — the US, the 15-nation eurozone and Japan — that are now in recession were forecast to contract a hefty 1.4 percent amid the worst financial crisis since the Great Depression.
Growth in those economies was seen at a mere 0.9 percent this year as the global credit crunch that began in the middle of last year exploded in September with the collapse of Wall Street investment bank Lehman Brothers.
The US economy, the world’s largest and the epicenter of the financial tsunami, would shrink 1.3 percent next year after growth of 1.2 percent this year, the IIF projections showed.
The eurozone would contract more sharply, by 1.5 percent from 0.9 percent growth, and Japan would shrink 1.2 percent after zero growth.
The sharpest markdown was for the emerging economies, including powerhouses China, India, Brazil and Russia.
Those engines of global growth had resisted the impact of the credit crunch gripping the advanced economies until the mid-September financial firestorm, the IIF said.
The IIF forecasted economic growth in emerging markets would brake to 3.1 percent next year after a 5.9 percent gain this year.
“Emerging Asian growth has slowed sharply, but should hold up better than in other regions,” it said.
China’s growth would drop to 6.5 percent next year from 9.3 percent this year and 11.9 percent last year, while India’s deceleration would be less steep, to 5.0 percent from 6.2 percent.
The IIF said “particularly weak growth” was forecast for central, eastern and southern Europe, with economic output of just 0.3 percent likely for next year after 4.5 percent this year.
Since the start of last year, the reported losses at financial institutions has topped US$1 trillion, the IIF said. Institutions have raised about US$930 billion since the middle of last year, with more than one-third coming from the public sector.
Hung Tran, head of the IIF’s capital markets and emerging market policy department, warned that those losses would increase amid the economic slowdown.
“The weakening economy will increase credit losses, continuing to put pressure on bank capital. This underscores the point that capital injection alone will not be sufficient to strengthen the banking system until the economy and financial markets stabilize,” Tran said.
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