The International Monetary Fund (IMF) announced on April 22 that the world economy would contract by 1.3% in 2009, its worst decline since World War II.

IMF’s global recession predictions

The IMF describes the current downturn as the deepest post-War recession and paints a dire picture: output in developed economies has been falling by 7.5% annual rate in the last quarter of 2008 and the same rate of decline is expected for 2009.

Most developed countries will find themselves in deep recession this year: the US will decline by 2.8%, France by 2.8%, UK by 4.1%, Italy by 4.4%, Germany by 5.6% and Japan by 6.2%. According to the IMF, the first good news would come only in 2010, when the drive in developing and emerging markets should return the world economy to positive growth, albeit a small one of 1.9%. In the meantime, such developed countries as UK, Germany and Italy are expected to continue to experience recession in 2010.

Has the recession bottomed out?

This news comes to sober up the discussion about ‘green shoots’ and ‘glimmers of hope’. New data in home sales, homebuilding and consumer spending had made Ben Bernanke, the chairman of the US Federal Reserve, suggest that “the sharp decline in economic activity may be slowing”. Barack Obama himself saw ‘glimmers of hope’, albeit warning that there is a long road until the end of the recession. China’s economy has recently shown signs of recovery, while German investors became positive for the first time in two years. In the UK, three in ten businessmen see green shoots of economic recovery, an approximately 10% rise in confidence over February. In a much-commented move, Goldman Sachs, which a few months ago accepted a big bailout from the government, now affirmed that it would like to pay the government’s money back.

Despite these positive signs, many analyses from The Economist and the Financial Times suggest that the recovery is far from assured. Decline may be slowing down, but that does not mean it has bottomed out. There is a danger that policymakers may fall into complacency or that the hopes would be raised too high and markets may end up slumping deeper.

The data is at best contradictory: while there were positive signs in home sales, US retail sales fell unexpectedly during March. US industrial production reached the lowest level since 1967. In the UK, the 2009 fall in national output has become the biggest since World War II. In April, the UK unemployment rate rose to 6.7% in the three months to February, up from 5.2% in the same period of 2008. For its part, the IMF has warned that there are no shortcuts to the recession, and that it will be deep and prolonged.

Origin of the recession

The current recession draws its roots on reckless bank lending linked to dubious mortgage debt management. Lax credit rules coupled with the unbridled sale of derivatives – a financial instrument that allows banks to manage their risk while leveraging profit – pushed housing prices higher and higher in many countries. The housing boom forced many people to go into debt and eventually into default.

Eventually, the bubble burst, with dire consequences not only for the US, but for the world economy as well. The downturn eventually resulted in the collapse of Lehman Brothers, with other famous investment banks having to be sold off or rescued by governments.

Global recession impact

The economic downturn has affected almost all the countries of the globe. While official recession has hit mostly developed countries like the US, UK, Germany and Japan, many developing nations have also experienced a slow-down of growth or risks of financial crisis. For instance, China’s growth has slowed to 6.5%, India’s to 4.5% and Africa’s to 2%. In Eastern Europe, burgeoning public debt and investor wariness have caused the governments of Hungary, Latvia, Romania, Poland and Ukraine to seek IMF support.

The global recession has worsened the livelihood of many around the globe, and particularly those near the poverty level. 2009 World Bank estimates suggest an extra 46 million people worldwide will be pushed below the poverty line, while an extra 53 million will be living on a day.

In another gloomy outlook, the World Bank has also warned that between 200,000 and 400,000 more children a year may die between 2009 and 2015 if the crisis continues.

Envisaged solutions

Analysts, economists and policymakers are divided on what the correct measures to fight recessions might be. Most developed countries have opted for the injection of large amounts of financing to prop up markets and banks. At the same time, some European governments such as those of France and Germany have underlined the importance of creating safety nets and tighter regulation. In the end, the end of the recession may not rest in one type of measure alone.