IMF cuts growth forecasts as outlook turns gloomy

Continuing counterparty risk will slow down the world's recovery from the financial crisis, the International Monetary Fund warned in its latest World Economic Outlook.

The IMF said that most advanced economies were already in or near recession, with a recovery due only in late 2009 - "the anticipated recovery will be exceptionally gradual by past standards" it added.

As a result, the IMF lowered its growth forecasts substantially, predicting that worldwide growth would be 3.9% this year and 3% in 2009 - 0.2 points and 0.9 points lower than it predicted in July. Italy and the UK would experience negative growth over 2009, it said.

The return to more liquid markets would be slowed by continuing counterparty risk, and "additional credit losses are likely" even if government interventions in the financial markets succeed, the fund said. It warned that, historically, financial crises that started in the banking sector had more severe economic consequences than those that started on the stock markets or the currency markets.

"A central objective is to ensure more effective and resilient risk management by individual institutions, including by setting more robust regulatory capital requirements and insisting on stronger liquidity management practices and improved disclosure of on- and off-balance-sheet risk. Another important task is to strengthen crisis resolution frameworks", the fund concluded, adding that more international regulation was also vital.

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