A lineup outside an unemployment office in Riga, Latvia.INTS KALNINS
The global recession is coming to an end, but the return to economic health is a long way off, and the route to recovery is laced with major risks, the International Monetary Fund says.
"The global economy is beginning to pull out of a recession unprecedented in the post-World War II era, but stabilization is uneven and the recovery is expected to be sluggish," the IMF says in an update to its World Economic Outlook, released just before leaders of the Group of Eight countries meet for a summit in Italy.
Developed countries have another year of dismal times ahead, the IMF projected. While recent data suggest the collapse of the global economy is over, and declines in economic activity are letting up, there are persistent deep problems that will prevent any kind of sustainable growth until the second half of next year, the IMF said.
"Despite these positive signs, the global recession is not over, and the recovery is still expected to be slow, as financial systems remain impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings," the update stated.
The global economy will contract by 1.4 per cent in 2009, but show 2.5 per cent growth in 2010. That kind of growth is still considered recessionary, but is better than the IMF's April projection for just 1.9 per cent growth next year.
Advanced economies are forecast to contract 3.8 per cent this year, but inch ahead with 0.6 per cent growth in 2010. Previously, the IMF had said there would be no growth next year.
As for Canada, it is expected to suffer a 2.3 per cent decline in economic activity in 2009, followed by a tepid 1.6 per cent expansion next year. Both numbers were revised slightly higher from the IMF's April forecast.
Generally, advanced countries are nearing the end of recession because the effects of financial shock, the freezing up of global trade and the widespread uncertainty plaguing investors have become far less problematic.
In the United States and Japan, in particular, industrial production and inventory corrections have probably turned the corner, and confidence is improving.
But some of the world's housing markets have not yet reached bottom, the IMF warned, and bank balance sheets still need significant cleansing before the economy can return to normal.
And even though the steep declines have let up, there does not seem to be any major engine in the world economy that will be able to drive global demand any time soon. China and India are still growing, but their expansion is "likely to peter out" unless advanced countries recover soon.
For now, the IMF warned, the only things supporting global growth are temporary: fiscal stimulus and inventory adjustments.
As for the debate within the G8 over whether advanced countries should be adopting new stimulus packages, the IMF chose its words carefully.
"Although fiscal policy should stay supportive through 2010, plans should be made for rebuilding fiscal balances and ensuring sustainable debt paths after growth is firmly reestablished," the report said.
The policy priority should be on restoring financial sector health, the IMF stressed. Central banks should also make sure their rates are as low as possible, and unconventional methods of fuelling credit flows should be kept in place for now.
In Canada and the United States, interest rates are already at rock bottom, and various methods of unconventional easing are in place, but the European Union still has room to move, analysts say.
Authorities need to do a better job defining and communicating exit strategies, the IMF advised, so that inflation fears don't get out of hand.
And in what is probably a message meant for China, the IMF said countries with large current account surpluses need to adopt policies that boost demand, so that other struggling countries such as the United States have someone to sell their exports to.
In a companion report that assesses global financial stability, the IMF said the world's financial conditions have improved, and the risk of a total collapse has receded, but the financial sector remains on shaky ground.
"The financial sector continues to be dependent on significant public support, resulting in an unparalleled transfer of risk from the private to the public sector," the report said. It stressed the need to start work on exit strategies to address market uncertainty.
Recently, investors in bond markets have expressed their lack of confidence in authorities' ability to control their spending and service their debts. Market interest rates have risen as a result, driving up the cost of mortgages at a delicate time.