Signs of life in world economy


The free-fall of the global economy may be abating but 2009 is still expected to be a difficult year.

In a speech to the National Press Club in Washington International Monetary Fund Managing Director Dominique Strauss-Kahn said, however, the world economy would enter “deeply negative territory” this year before it starts to recover in the first half of 2010.

“Of course, the solutions differ by country, but there must be a coherent and co-ordinated response by the international community,” he said.

The IMF is scheduled to release updated world economic forecasts on Wednesday. Last month it forecast the world economy will contract by between 0.5 to 1.0 percent this year.

Speaking ahead of IMF and World Bank spring meetings in Washington next week, Strauss-Kahn said there were three urgent priorities before for a recovery can begin in earnest.

These include the need for governments in advanced economies to fix their financial sectors by cleaning banks’ balance sheets of toxic assets, and ensuring that fiscal stimulus measures are not withdrawn prematurely.

“Until this is done, attempts to restore demand are likely to falter,” he added. “We need forceful and urgent action, as well as co-ordination among the affected economies,” Strauss-Kahn said.

In addition, there is an urgent need to ensure that sufficient financing is available to help emerging and developing nations cope with the financial crisis, he said.

He welcomed commitments from the G20 summit to triple IMF resources to a total of $750 billion, to help fund emerging and developing countries hard hit by falling demand and declines in private capital flows.

Later, he said he was confident the G20 would keep its word to raise an additional $500 billion for the IMF above the $250 billion already in the IMF war chest.

He said the IMF had so far raised $400 billion of the $500 billion promised at the G20 summit, with more countries expected to contribute to make up the total sum.

Strauss-Kahn said by increasing the IMF’s resources “the world community has placed its trust in the IMF and we intend to live up to that trust.”


Meanwhile, he said the US plan to deal with affected bank assets was a “major step forward” but its success depended on the willingness of banks to sell their toxic assets.

The United States has been mired in a severe recession since the collapse of the US housing bubble in 2007.

New IMF research published on Thursday said recessions tied to financial crises were unusually long and severe and the recovery sluggish.

It called for aggressive and co-ordinated monetary and fiscal policies, and said restoring confidence in the financial sector was important for economic policies to work.

Strauss-Kahn said the IMF was ready to play a greater role in helping countries emerge from the crisis and to spot crises before they happen.

“For our part, the IMF is ready to play its role,” he said, adding that the IMF had to also adapt by making its lending more flexible and better tailored to countries’ needs.

He cited a new flexible credit line for emerging economies that comes with no strings attached for well-run, strong performing countries that may be hit by spillovers from the financial crisis in advanced economies.

So far Mexico and Poland, both with good economic track records, have applied for the line of credit to shield their economies in case they need to.

Strauss-Kahn said he expects more countries to follow.

He said it was also important that countries come to the IMF for financial help early on before the crisis takes a toll on an economy.

But to be effective, he said the IMF also needs to increase the voting power of rising economic powers, under a plan endorsed by the IMF last year but waiting the approval of legislatures of member countries, including the United States.