IMF Chief: Global Freefall May Be Ending

The global economic meltdown may be starting to wind down, and recovery could emerge in 2010 if countries act together and immediately adopt policies aimed at ending the recession, the head of the International Monetary Fund said Thursday.

Dominique Strauss-Kahn said "2009 will almost certainly be an awful year; we expect global growth to enter deeply negative territory."

He said the impressive economic gains many countries have made during the past decade are threatened.

Of greater concern, he said, is the effect the crisis will have on low income countries, threatening "to cast millions back into poverty; the human consequences here could be absolutely devastating."

Strauss-Kahn said at last month's G20 summit in London that presidents and prime ministers from rich countries and emerging market nations focused on urgent actions needed to restore growth and on what must be done to repair some of the underlying problems that caused the world crisis.

He said changes should focus on three areas: the financial sector; more fiscal stimulus "because we are not out of the woods yet," and provision of the money necessary to help countries overcome the economic and social costs of the crisis.

"The freefall in the global economy may be starting to abate, with a recovery emerging in 2010," he said.

Strauss-Kahn said banks and other financial institutions must be made whole first "if we are to get the global economy moving again. Until this is done, attempts to restore demand are likely to falter."

Asked to respond to Strauss-Kahn's forecast on CBS' The Early Show, Forbes CEO Steve Forbes said that "He is right.

"If we just follow through in getting that credit flowing again, we've been through a harrowing period. And the key thing is, when will people really start to feel it? They'll start to feel it first when they can actually open their 401(k) envelopes and not faint with horror. And when they start to see home sales moving again, then I think you'll start to see activity really revive."

Strauss-Kahn, a former French finance minister, said the area where the ministers were boldest was their agreement to triple the IMF's lending capacity to an unprecedented $750 billion and to double the resources the IMF has for lending to low-income countries,

"We now have the resources to make a difference," he told the National Press Club in a speech previewing the IMF spring meeting coming April 25-26.

He said the IMF, a 185-nation Washington-based lending institution, must now live up to the trust placed in it by the international community.

"It cannot be simply 'business as usual,'" Strauss-Kahn said. "The IMF needs to adapt. Its lending must be more flexible and better tailored to country circumstances."

He said the IMF has addressed a major gap in the global financial architecture by introducing a new line of credit that would grant rapid upfront financing in large amounts with few, if any, conditions for a country with a proven economic track record.

"Mexico and Poland already have sought access to this new facility, and I expect more countries to follow suit," Strauss-Kahn said. "More generally we are committed to providing larger amounts and more upfront financing across the board" to encourage countries to approach the IMF early before its economy begins to unwind.

Earlier the IMF said the economic meltdown many countries are experiencing is likely to last longer than typical recessions and be followed by a weaker than average recovery.

The IMF said the combination of a widespread financial crisis and an economic downturn affecting many countries at the same time is historically rare, and interpretations of these events should be made with caution.

"Nonetheless, the fact that the current downturn is highly synchronized and associated with deep financial crises suggests that it is likely to be persistent, with a weaker-than-average recovery," the IMF said in the analytical chapters to its semiannual World Economic Outlook released in advance of the report's publication next week.

Economic recessions usually are short and recoveries are strong, the IMF said, with a typical recession lasting about a year and the ensuing bounce-back expansion lasting more than five years.

Recessions associated with broad financial crises, however, typically have been severe and drawn out, the IMF said.

Excluding the present recession, there have been three episodes since 1960 during which 10 or more of the 21 advanced economies the IMF studied were in recession at the same time: 1975, 1980 and 1992.

"The duration of a synchronous recession is, on average, nearly 1½ times as long as a typical recession," the IMF said. "Recoveries are usually sluggish, owing to weak external demand, especially if the United States is in recession."

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