In its latest World Economic Outlook (WEO) released overnight the IMF paints a bleak outlook for the global economy, and particularly for advanced economies, which are expected to contract by an unprecedented 3.8 per cent in 2009.
The IMF notes that "the global economy is in a severe recession inflicted by a massive financial crisis and acute loss of confidence". It expects the global economy to contract by 1.3 per cent in 2009.
The IMF notes that "by any measure, this downturn represents by far the deepest global recession since the Great Depression".
The IMF's bleak assessment – together with the substantial downgrades in its global growth forecasts – present the most challenging global backdrop to an Australian Budget in living memory.
The deepening global recession will have severe consequences for the Budget's forecasts for economic growth, unemployment and revenue, which will be substantially worse than reported in the Updated Economic and Fiscal Outlook in February this year.
The IMF now envisages financial market stabilisation to take longer than previously expected and cautions that even once the crisis is over, growth may take some time to recover.
Against this backdrop, the IMF now expects a longer, deeper global recession. This latest report contains the fifth downgrade of the IMF's global growth forecasts in just over six months, illustrating just how rapidly the global economy has deteriorated.
The severity of this global recession has dragged the Australian economy into recession. The IMF expects the Australian economy to contract by 1.4 per cent in 2009, before growing by 0.6 per cent in 2010.
This is a much milder contraction than expected in almost every other advanced economy, which combined are expected to contract by an unprecedented 3.8 per cent in 2009.
Deep recessions are forecast for all major advanced economies. The United States is expected to contract by 2.8 per cent in 2009, the euro area by 4.2 per cent, the UK by 4.1 per cent and Japan by 6.2 per cent. The IMF expects every advanced economy except Cyprus to contract in 2009.
The IMF also forecasts that, as a result of the global recession, unemployment in Australia will rise to 7.8 per cent by 2010. This compares to an unemployment rate of 9.2 per cent for advanced economies as a whole, with unemployment rates in many advanced economies expected to reach double-digits.
The IMF expects the global economy will recover gradually in 2010. However, it cautions that recovery will only be achieved if authorities continue efforts to heal the financial sector, while continuing to support demand with monetary and fiscal easing. The IMF warns that there is a real danger that the global economy will continue to deteriorate for a protracted period.
The global recession has severely eroded government budgets around the world, with budget deficits for major advanced economies expected to reach 10½ per cent in 2009. However, despite the impact of the global recession on government revenues, the IMF notes that Australia's fiscal position remains robust.
As I have repeatedly noted, Australia is better placed than most other nations, in large part due to the decisive action taken by the Rudd Government to cushion Australians from the worst impacts of this severe global recession.
The Government has taken important steps to strengthen our financial system, including guaranteeing the deposits and wholesale funding of Australia's banks, building societies and credit unions.
The Government has also put in place substantial economic stimulus to support activity and jobs in our economy, consistent with the IMF's recommendations. This stimulus is working, and is one of the reasons why Australia is faring better than practically all other developed nations.
The further deterioration in the global economy underscores why it is so important that the Budget continues to support jobs now and invest in the building blocks of the recovery in the most responsible and sustainable way.
The IMF's bleak assessment of the global economy also underscores the need for the Australian Government to engage internationally at the highest levels ahead of this year's Budget. That is why I will be meeting with my fellow G-20 Finance Ministers in Washington DC this weekend to discuss the deteriorating global outlook and our joint efforts to tackle these substantial challenges.
23 April 2009