IMF sees no green shoots of recovery

The International Monetary Fund is going to warn that the recession is likely to be ‘unusually long and severe, and the recovery sluggish’ in its next World Economic Outlook, reveals The Daily Telegraph.

This does not dovetail with the ‘green shoots of recovery’ noted by President Obama and sundry Wall Street optimists last week.

Of the implications for unemployment, IMF head Dominique Strauss-Kahn said: ‘The human consequences could be absolutely devastating. This is a truly global crisis, and nobody is escaping. The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today.’

Toxic assets

His formula is urgent action to cleanse bank balance sheets of toxic assets. But the IMF also notes that for high-debt countries the impact may become negative, with 60 per cent of GDP the cut-off point. That leaves the US, UK, Japan, Germany, France and Italy at risk from a deeper recession and the only comparison is the 30s.

‘While the credit boom in the 1920s was largely specific to the US, the boom during 2004-2007 was global, with increased leverage and risk-taking in advanced economies and many emerging economies,’ says the report obtained by The Daily Telegraph.

‘Levels of integration are now much higher than during the inter-war period, so US financial shocks have a larger impact.’ In short, what has been leveraged up over a decade, now has to be leveraged down, and that will take time.

The IMF says that synchronized global recessions are ‘historically rare’ but last typically 50 per cent longer than a normal recession and are followed by lengthy recovery periods. Is this not a more realistic assessment than the optimistic statements we have heard from an unholy alliance of politicians and Wall Street veterans over the past week?

Different this time?

Why should it be different this time? Is there any reason why it should be, other than a stubborn refusal to acknowledge reality, or an inability to recognize it, or self-interest in playing a market rally? There is also a dangerous willingness to persist with risky macroeconomic policies whatever the future consequences.

How can any rational person be optimistic about a quick recovery in global economies in the face of such a clear and damning report from the IMF? This is not another statement from the Dr Dooms but the world’s pre-eminent macroeconomic body.