IMF Forecasts Contractions in U.S., Europe, Japan Next Year

By Christopher Swann

Nov. 6 (Bloomberg) -- The International Monetary Fund predicted economic contractions in the U.S., Japan and euro region next year, calling for further interest-rate cuts and fiscal stimulus.

``Markets have entered a vicious cycle of asset de- leveraging, price declines and investor redemptions,'' the IMF said in an update to its World Economic Outlook report, released in Washington today. ``Global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth.''

The revisions reflect a further choking-off of credit to companies and businesses in the past month. The Bank of England today declared the most serious banking ``disruption'' in almost a century, cutting its benchmark interest rate to the lowest level since 1955.

U.S. gross domestic product will contract 0.7 percent, Japan's will shrink 0.2 percent and the euro area's 0.5 percent in 2009, the IMF said today in Washington. The fund last month foresaw 0.1 percent U.S. growth, with expansions of 0.5 percent in Japan and 0.2 percent in the euro zone.

Global growth will be 2.2 percent next year, down from 3.7 percent this year, the IMF said. The fund said in its semiannual World Economic Outlook report on Oct. 7 that world GDP would rise 3 percent in 2009. As recently as July, IMF economists expected a 3.9 percent expansion.

The IMF has said that a growth rate of 3 percent or less is ``equivalent to a global recession.''

`Hard Hit'

Growth in the U.S. ``will suffer as households respond to depreciating real and financial assets and tightening financial conditions,'' the IMF said. In Japan, ``growth from net exports is expected to decline.'' The 15-nation euro region will be ``hard hit'' by the slowdown, the fund said.

The IMF also warned today of growing risks of deflationary conditions in advanced economies.

``There is a clear need for additional macroeconomic stimulus relative to what has been announced thus far,'' the fund said. ``Room to ease monetary policy should be exploited, especially now that inflation concerns have moderated.''

As the credit crunch widens, the reversal in major developed countries is spreading to poorer nations, increasing demand for IMF loans.

In emerging and developing countries, GDP in 2009 will increase 5.1 percent, less than the 6.1 percent expansion the fund predicted in October. China's growth will measure 8.5 percent next year, weaker than the 9.3 percent forecast a month ago.

Since the fund produced its forecast in October, the outlook for developing countries has deteriorated as investors shunned their currencies and bonds, sending borrowing costs climbing.

Demand for the fund's emergency loans -- which had slumped in recent years amid a boom in emerging markets -- has surged, with Hungary, Ukraine, Belarus and Iceland all asking for financial help from the IMF.

To contact the reporters on this story: Christopher Swann in Washington at cswann1@bloomberg.net.