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October 09, 2008 01:00 AM

Chances of global depression very small, IMF says

Agency sees economic rebound in the second half of next year

Neil Roland
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    The distressed world economy is likely to start bouncing back in the second half of next year and “gather strength” in 2010 if governments continue to implement effective economic policies, the International Monetary Fund’s chief economist said.

    The unprecedented action by six central banks to cut interest rates by half a point “is clearly a step in the right direction,” economist Olivier Blanchard told reporters Wednesday. “More may be needed.”

    The chances of the first global depression since the 1930s are “very small,” he added.

    “I sense the urgency that markets are making extraordinarily clear will force governments to adopt coherent plans in the near future,” Mr. Blanchard said.

    The briefing followed the IMF’s release of its latest World Economic Outlook, which projects growth in advanced countries to be close to zero until at least the middle of 2009.

    Any U.S. economic revival hinges on a turnaround in the housing sector and more stable oil prices, the IMF said in a news release. The domestic recovery “is expected to be much more gradual than in most previous economic cycles” because of the credit crunch, the statement said.

    Wednesday’s coordinated interest rate cut by central banks including the Federal Reserve and the European Central Bank came alongside separate rate cuts by central banks in China, Hong Kong and Australia. Britain also injected £50 billion ($87 billion) of taxpayers’ money into its banks.

    “There’s still skepticism in the markets as to whether government measures will be sufficient,” Mr. Blanchard said. But he said global stock markets will bounce back as more government actions are taken “and people realize they’ll eventually work,” he said.

    The IMF projected that world output would rise by 2.8% in the fourth quarter, from a year ago, bringing down its 2008 estimate to 3.9% growth, compared with 5% in 2007. Growth will continue to slide in 2009, with 3% forecasted.

    Estimates of declining growth are even more pronounced for the U.S. and other advanced economies.

    Advanced economies are estimated to have 0.7% growth in the fourth quarter, dragging down 2008 growth to 1.5%, compared with 2.6% the year before, according to the IMF. In 2009, their output is projected to rise only 0.5%.

    In the U.S., fourth-quarter growth is projected at 0.8%, with 2008 growth at 1.6% compared with 2% the year before. In 2009, U.S. output is projected to increase only 0.1%.

    These figures are in stark contrast to the growth rates projected for China and India.

    In China, fourth-quarter growth is projected at 9.2%, with 9.7% estimated for all of 2008, compared with 11.9% the year before.

    In India, fourth-quarter growth should hit 7.2%, with 7.9% projected for all of 2008. That’s compared with 9.3% the year before.

    “India has a strong internal growth dynamic” with rapid productivity increases, Charles Collyns, deputy economic research director at the IMF, said at the briefing. “The Indian economy is continuing to perform well.”

    Neil Roland is a reporter with Financial Week, a sister publication of Pensions & Investments.

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