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Published October 2008
The International Monetary Fund released the October 2008 update of this report in the midst of global financial downturn and two days before the yearly IMF meetings in Washington DC.
The foreward states, "Developments in financial markets have dominated
the news in recent weeks. The subprime crisis that unfolded in 2007 has now morphed
into a credit crisis that has caused major disruption to financial institutions in the United States
and Europe. Intensifying solvency concerns about a number of the largest U.S.-based and
European financial institutions have pushed the global financial system to the brink of systemic
meltdown. The effects on the real economy have been limited so far. In part, this may be because tax rebates in the United States supported consumption, while strong nonfinancial corporate balance sheets and profitability have allowed firms to use their own funds rather than borrow. But neither of these factors can be expected to last for very long. Credit conditions have become significantly tighter in recent weeks, threatening the ability of nonfinancial firms
and a number of emerging economies to raise capital. The U.S. and European authorities have taken extraordinary measures, including massive liquidity provision, intervention to restore
weak institutions, extension of guarantees, and recent U.S. legislation to use public funds to buy
troubled assets from banks. But it is not yet clear that these measures will be sufficient to stabilize markets and bolster confidence, and the situation remains highly uncertain.
This is not the only shock buffeting the world economy. Prices of oil and basic commodities
have reached historically high levels in recent months. In advanced economies, a combination
of real wage flexibility, well-anchored inflation expectations, and prospects of sharply
reduced activity have helped to limit rises in core inflation. But in emerging and developing
economies, the impact has been much more damaging. Real wages have fallen substantially.
Oil exporters have found it difficult to dampen overheating economies.
Looking to the future, it is necessary to assess how these shocks will likely work their way
through the world economy. Our forecasts are based on three major assumptions. The first
is that commodity and oil prices are likely to stabilize, relieving pressure on inflation and
giving more room, if needed, for expansionary policies. The second is that U.S. housing prices
and activity will hit bottom within the next year, leading to a recovery of residential investment. The third is that, although credit will remain tight, the elements of a systemic solution to the financial crisis are now being put in place and will prevent a further worsening of financial intermediation. It is this combination that leads us to forecast that world growth will begin to recover at the end of 2009, albeit at a very slow pace. There is, however, more than the usual amount of uncertainty, and the downside risks are far from negligible."
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