World heading towards recession: IMF

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The International Monetary Fund, in its bleakest forecast in years, said on Wednesday the world economy was set for a major downturn with the United States and Europe either in or on the brink of recession.

The IMF said the worst financial trauma since the Great Depression would exact a heavy economic toll as investors wrestle with a crisis of confidence and a credit crunch.

"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 World Economic Outlook.

The assessment was written before a coordinated interest-rate cut of a half-per centage point on Wednesday by the US Federal Reserve, European Central Bank, Bank of England, Switzerland, Canada and Sweden.

China also joined the move with a more modest cut.

The IMF's new chief economist, Olivier Blanchard, said the coordinated drive was a step in the right direction, but more action may be needed as the world economy slows.

"Fifty basis points is not nothing," Blanchard told a news conference. But he said monetary policy was only part of the answer and further measures were needed to clear up clogged credit markets. "More is needed, in particular in Europe," he said.

In an interview, Blanchard said the rash of crises in recent weeks had convinced world policy-makers that it was time to work together to find a way out of the credit turmoil, which has raged for 14 months.

"Events focus the mind," Blanchard said. "What's absolutely essential to solve this financial crisis is the perception by the public and by the markets that there is a coherent plan."

WORKING TO AVERT DEPRESSION

In its twice-yearly World Economic Outlook, the IMF slashed its 2009 forecast for world growth to 3 per cent, which would be the slowest pace in seven years, from a July projection of 3.9 per cent, and warned that a recovery would be unusually slow.

It said growth this year would come in at 3.9 per cent, a touch below the 4.1 per cent it projected in July.

While the world economy was unusually frail, Blanchard said there was little chance of a global depression, provided leaders adopt policies to address market distress.

"If the right policies are in place, then the probability of a 'Great Depression' is extremely small," he said.