Global output set for first fall in 60 years

Global economic activity will fall this year for the first time in 60 years, according to the International Monetary Fund (IMF).

In a report submitted last week to the G20 summit in London, the IMF said that activity will drop between 0.5% and 1% over 2009, after an annualised global GDP contraction of 5% in the fourth quarter of last year.

The report says the scale of the global economic crisis is much worse than expected. It particularly blames the contraction in activity on a sharp slowdown in advanced economies, which are registering their sharpest declines since the second world war. GDP in developed economies plunged 7% in the last quarter of 2008, led by Japan, which dropped by 13%, a post-war record.

The extent of the downturn has sharply reversed inflationary risks posed by the meteoric rise in commodity prices in the first half of 2008. The retreat of commodity prices after July, along with increasing global economic weakness has meant that the greater threat is now deflation. IMF analysis suggests that the deflationary vulnerabilities of the G7 group of industrialised nations have risen above their previous peak because of concerns particularly over Japan and America, although Germany, Italy and France are also at moderate risk levels.

Emerging economies, however, have also suffered because of “acute external financing pressures”. Their prospects are inextricably linked to the fates of advanced economies because their potential for recovery relies heavily on an easing in credit market conditions and a recovery in global demand.

The key factor in any recovery will be restoring confidence in markets and dealing directly with problems in the financial sector, according to the report. Although fiscal stimulus already announced will have a significant effect, the IMF stresses that this still “falls short of the 2% of aggregate GDP in 2009 and 2010 recommended by the IMF, particularly in 2010”.

Modest growth is still forecast for 2010 although it is conditional on ­further fiscal support, an improvement in credit markets and commodity prices remaining low. On current projections the IMF expects global growth of between 1.5% and 2.5% next year, driven by growth of 3.5%-4.5% in emerging markets.