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World recession easing, sluggish recovery in sight, says IMF

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The world is starting to pull out of its first recession since World War II, said the International Monetary Fund in its latest report released Wednesday. According to the latest report, the global economy was already stabilizing, the financial crisis easing and the recession ending by the second half of this year.

“The good news is that the forces pulling the economy down are decreasing in intensity,” IMF Chief Economist Olivier Blanchard told a July 8 press briefing. “The bad news is that the forces pulling the economy up are still weak. The balance is slowly shifting, and this leads us to predict that, while the world economy is still in recession, the recovery is coming. But it is likely to be a weak recovery,” Blanchard said.

The IMF updated its World Economic Outlook saying that the global economy is likely to contract by 1.4 per cent this year, a little worse than the 1.3 per cent predicted in April. The IMF on the other hand lifted its forecast for growth in 2010 from April’s forecast of 1.9 per cent growth rate to 2.5 per cent.

The IMF suggested that government intervention has improved conditions around the globe and helped steer clear from systemic collapse. The IMF also said policies should remain supportive until growth resumes and deflationary risks dissipate. Central banks should cut interest rates further wherever possible.

Recovery like sluggish

Despite signs of recovery, the IMF warned that governments shouldn’t become complacent, as the return to positive growth will likely be slow.

“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 fund said.

Despite these positive signs, the global recession is not over, and the recovery is still expected to be slow as financial institutions remain weak and credit intermediation impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings.

The main policy priority remains restoring financial sector health. Macroeconomic policies need to stay supportive, while preparing the ground for an orderly unwinding of extraordinary levels of public intervention. At the same time, given weak internal demand prospects in a number of current account deficit countries, including the United States, policies need to sustain stronger demand in key surplus countries.

Banks and markets still need “fixing”

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. Securitization remains impaired, except where there is official support. Bank credit growth is still slowing and deleveraging continues, which is likely to place a drag on economic recovery. As a result, more public intervention may be needed in the near term.

“We are at a critical stage in emerging from the crisis. We need to guard against slipping backwards, and be ready to do whatever is needed to address any remaining problems in the financial system. This is an indispensable condition for ensuring a sustained economic recovery,” Vinãls said.

(From globalcrisisnews)

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