IMF Says World Economy Heading for `Major Downturn'

By Christopher Swann

Oct. 7 (Bloomberg) -- The global economy is headed for a recession next year, as U.S. gross domestic product grinds close to a halt, the International Monetary Fund said in reports ahead of a Group of Seven meeting this week.

``The global economy is entering a major downturn,'' the fund said in a staff report, dated Oct. 4 and obtained by Bloomberg News. ``Many advanced economies are now close to recession, while emerging economies are also slowing rapidly.''

Growth is slowing from China to Switzerland as policy makers struggle to contain the worst financial crisis since the Great Depression. The Dow Jones Industrial Average dropped below 10,000 for the first time in four years yesterday and Federal Reserve Chairman Ben S. Bernanke said today that ``the downside risks'' for growth have increased.

The U.S. will expand 0.1 percent in 2009, after growth of 1.6 percent this year, the IMF said in a draft of its World Economic Outlook scheduled for release tomorrow and also obtained by Bloomberg. In the WEO released in April, the IMF said the U.S. economy would grow 0.5 percent this year and 0.6 percent in 2009.

The global economy will expand 3 percent next year, lower than the IMF's forecast in April of 3.7 percent and down from 3.9 percent this year, according to the latest WEO. In April, the IMF predicted a 25 percent chance of worldwide growth at or below 3 percent, which it said was ``equivalent to a global recession.''

The IMF staff report suggested that the European Central Bank has scope to reduce borrowing costs to help limit economic damage from the financial market crisis.

`Mild Recession'

``All the advanced economies are stagnant or in mild recession now,'' John Lipsky, the IMF's first deputy managing director, in a Bloomberg Television interview. The slowdown is removing ``inflationary dangers,'' making it appropriate for central banks in some countries to respond with lower interest rates, he said.

The Washington-based lender said in the staff note that the dollar is ``in line'' with economic fundamentals, the euro is ``on the strong side'' and the yen is ``undervalued'' in the medium term.

IMF spokeswoman Conny Lotze declined to comment on the figures.

The IMF staff report said growth will be ``particularly weak'' in the G-7 countries -- the U.S., Japan, Germany, France, the U.K., Canada and Italy.

`Looming Recession'

A recession in the U.S. is ``looming,'' growth in western Europe is ``weakening markedly,'' activity in Japan is ``cooling rapidly'' and emerging countries ``have not decoupled from this downturn'' the staff report said.

Of advanced economies, the IMF made its steepest reduction in the growth prediction for U.K., which the fund predicted will contract by 0.1 percent next year, the WEO said. Six months ago, the IMF forecast U.K. growth 1.6 percent in 2009.

Italy's economy will contract 0.2 percent, the IMF predicted, a reduction from its April forecast for 0.3 percent, the report said.

The fastest-growing G-7 country will be Canada, where GDP is forecast to increase 1.2 percent, the IMF report said, after a 2 percent outlook in April.

The IMF report showed Germany's is expected to post zero growth next year, compared with a prediction in April of a 1 percent expansion. France's economy will register 0.2 percent growth, down from a 1.3 percent forecast six months ago, the report said.

Central Banks

In the U.S., the Fed's ``monetary policy is already highly accommodative,'' the IMF staff report said. Bernanke said today the central bank ``will need to consider whether the current stance of policy remains appropriate.''

The Bank of Japan's interest-rate policy stance ``remains accommodative and should remain so given that the economy has weakened and that underlying price pressures are well contained,'' it said.

For the ECB, ``monetary conditions are now quite tight,'' the report said. ``In light of this, there is now scope to ease monetary policy.''

To contact the reporter responsible for this story: Christopher Swann in Washington at cswann1@bloomberg.net