IMF: World Headed for 'Global Recession'

Oct. 8, 2008 — -- Damage from the financial meltdown is expected to push the United States into a deepening recession, and the wider effect will be a sharp slowdown of the global economy, according to a report by the International Monetary Fund released today.

The IMF's World Economic Outlook sharply revised preductions for growth in the global economy and painted a darker portrait of prospects for the financial health of the United States, according to The Associated Press, which reviewed the report.

"The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s," the IMF said in its report, according to the AP.

The report projects that the global economy will slow from a growth rate of 5 percent last year to 3.9 percent this year and 3 percent next year, which would be the lowest level since 2002, according to the AP.

A global growth rate of the 3 percent or less is considered by the IMF to be a wordwide recession.

The report came as the Federal Reserve, along with the Bank of Canada, the Bank of England, the European Central Bank, Sweden's central bank and the Swiss National Bank came together to cut interest rates.

The Fed dropped its key federal funds rate from 2 percent to 1.5 percent. Fed chairman Ben Bernanke as much as telegraphed this cut could happen -- though perhaps not this soon -- Tuesday when he spoke in Washington and said U.S. "economic growth has worsened."

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Overnight before the announcement, Tokyo's Nikkei closed down 9.4 percent -- its biggest drop in 21 years. European markets initially opened down and then retreated again into negative territory. U.S. markets initially benefited from the cut and then also retreated. By noon, the Dow was down roughly 200 points. Then just an hour later, it returned to positive territory.

The half point cut announced by the Federal Reserve is the largest intra-meeting rate cut since the big .75 percent cut Jan. 21. Cutting rates between scheduled meetings is rare, so today's action can be seen as exceptional and an acknowledgement that the economy is in trouble. China's central bank also announced a rate cut today.

Investors and market analysts around the globe have talked about the need for greater coordination among central banks to combat what has now become a global economic slowdown.

Kenneth S. Rogoff, an economics professor at Harvard University and a former economist at both the International Monetary Fund and the Federal Reserve, called the cut "a positive development."

"It's just a no-brainer that the central banks needed to try cutting interest rates with the wholesale panic going on," he said.

Rogoff said that the banks have, up until now, tried to draw a distinction between its monetary rate-setting policy and being the lender of last resort.

"But the panic is so overwhelming at this point that they really need to fire on all fronts," Rogoff said, adding that the 0.5-percent, or 50 basis point cut, "should have been more aggressive."

"They think 50 basis points in aggressive. But in this environment it's not," Rogoff said. "It should have been 100."