On the back of a $2.2 trillion loss on toxic U.S. assets worldwide, the global economy is expected to contract in 2009 before recovering the following year, according to a report from the International Monetary Fund (IMF) on Wednesday.
"Unless stronger financial stains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth," read the report, which urged governments to continue taking action to rescue the financial system.
"We now expect the global economy to come to a virtual halt," said IMF chief economist Olivier Blanchard at a press conference.
As a consequence, the global economy is expected to grow 0.5% in 2009 rather than by 2.2% as previously estimated, and expand by 3.0% in 2010.
The bulk of the contraction is expected from developed nations, with the U.S. shrinking 1.6% in 2009 and growing 1.6% in 2010 and the euro zone economy falling 2.0% this year before rebounding to a 0.2% growth rate the following year.
The Canadian economy is expected contract 1.2% in 2009 and grow 2.2% in 2010, while Japan's economy is forecast to shrink 2.6% in 2009 before growing 0.6% the following year.
Meanwhile, developing nations are expected to contribute a 3.3% growth rate in 2009 and 5.0% GDP growth in 2010. China is believed to lead the pack with a 6.7% growth rate this year and 8.0% growth rate in 2010.
To address the situation, the IMF report voiced support for the so-called 'bad bank' approach where governments could set up a financial institution to purchase toxic assets, removing them from the balance sheets of banks.
"We think that more decisive action is needed now by both policy-makers and market participants, and with greater emphasis on balance sheet cleansing," said Jaime Caruana, financial counsellor of the IMF.
On Tuesday evening, CNBC reported that the Barack Obama administration was working on creating a 'bad bank', with an announcement coming next week.
By Erik Kevin Franco and edited by Nancy Girgis
©CEP News Ltd. 2009