The global economy will contract sharply this year and recover only sluggishly in 2010, the International Monetary Fund said on Wednesday as it called on governments to sustain or even increase fiscal stimulus next year.

The IMF said that world output would contract by 1.3 per cent this year and grow by just 1.9 per cent the year after in what it described as a “substantial downward revision” of its January forecasts, when it said that the global economy would grow by 0.5 per cent this year and spring back to 3 per cent growth in 2010

Its assessment provides a sobering counterpoint to excitement over “green shoots” of recovery in some recent data.

The new forecasts came as Japan reported its first quarterly trade deficit in nearly three decades for the year to March, highlighting the global downturn’s effect on the world’s second-largest economy, which remains heavily reliant on exports.

Meanwhile, Tim Geithner, US Treasury secretary, warned against prematurely scaling back efforts to support the global economy.

Speaking in Washington DC, Mr Geithner noted “encouraging signs” in the world economy and financial markets. But he said: “We still face significant risk and challenge. For this reason it is critically important that we continue to act to strengthen the basis for recovery.”

His comments came as the US authorities prepared to discuss the outcome of bank stress tests with executives from Friday. The authorities will explain to each bank how much, if any, extra equity they need in order to be well enough capitalised to comfortably withstand a deeper-than-expected recession.

Source/Full Story:: FT.com

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