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In bleak forecast, IMF sees major downturn

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By Lesley Wroughton
Wednesday, October 8, 2008

WASHINGTON (Reuters) - The International Monetary Fund, in its bleakest forecast in years, said on Wednesday the world economy was set for a major downturn with the United States and Europe either in or on the brink of recession.

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The IMF said a still-developing financial upheaval -- the most violent since the 1930s -- would exact a heavy economic toll as markets wrestle with a crisis of confidence and global credit is choked off.

The IMF's assessment was written before a coordinated interest-rate cut of half a percentage point delivered by the U.S. Federal Reserve, European Central Bank, Bank of England, Switzerland, Canada and Sweden on Wednesday.

China also cut its key rate 27 basis points and its reserve requirements for banks by half a percentage point.

The IMF's new chief economist, Olivier Blanchard, said the coordinated drive was a step in the right direction but more action may be needed as the world economy slows.

"Fifty basis points is nothing," Blanchard told a news conference, adding that monetary policy was only part of the answer and further measures were needed to clear up clogged credit markets.

"More is needed, in particular in Europe, at this point," he said.

In its twice-yearly World Economic Outlook, the IMF slashed its 2009 forecast for world growth to 3 percent, which would be the slowest pace in seven years, from a July projection of 3.9 percent, and warned that a recovery would be unusually slow.

It said growth this year would come in at 3.9 percent, a touch below the 4.1 percent it projected in July.

While it was unusually weak, Blanchard stayed clear of calling the 3 percent forecast for global growth a recession.

"Our position is that it is not useful to use the word recession when the world is growing at 3 percent. That being said, 3 percent is a very low number," he said.

Blanchard also said there was little chance of a global depression, provided that leaders quickly adopt coherent policies to address market distress.

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