Spectre of war as global economy crumbles in 'The Great Recession'

Published on 10/03/2009 20:48

THE global economy will be slammed into reverse later this year, in the greatest recession of "our lifetime", international financiers warned yesterday.

The economic crisis could even lead to wars as millions of people fall back into poverty, they said.

The warning came as official figures showed British manufacturing had suffered its biggest fall in output in 40 years.

The International Monetary Fund had forecast global growth of more than 2 per cent for 2009 but yesterday this was cut to less than zero as economists warned the recession would ravage businesses, consumers and financial institutions around the world.

Dominique Strauss-Kahn, the managing director of the IMF, said: "The IMF expects global growth to slow below zero this year, the worst performance in most of our lifetimes."

Speaking to African leaders, Mr Strauss-Kahn said the effects of this "Great Recession" would be devastating to Africa, which had expected growth of about 6 per cent this year.

Instead, sub-Saharan Africa is now forecast to expect growth of 3 per cent while the rest of the world is expected to perform even worse, plunging the global economy into decline. The IMF chief said: "Continued de-leveraging by world financial institutions (trying to cut debts drastically], combined with a collapse in consumer and business confidence, is depressing domestic demand across the globe, while world trade is falling at an alarming rate and commodity prices have tumbled."

He warned that millions of people in Africa would be thrown back into poverty by the crisis, while fragile political systems would be tested.

Mr Strauss-Kahn went on: "This is not only about protecting economic growth and household incomes.

"It is also about containing the threat of civil unrest, perhaps even war. It is about people and their futures."

The former UN secretary-general Kofi Annan said Africa was facing "the equivalent of a tsunami" and the threat came as the region was just getting into its stride economically.

In the United Kingdom, the Office for National Statistics said manufacturing output, which accounts for about 14 per cent of the economy, had fallen by an annual rate of 12.8 per cent in January – marking the steepest decline since 1981.

In the three months to January, factory output had tumbled by 6.4 per cent compared with the previous quarter, the biggest drop since records began in 1968.

Economists described the figures as "horrific", while the British Chambers of Commerce said they highlighted the need for action to prevent further job losses. Britain's manufacturing sector has been battered by a slump in domestic demand, weaker activity in key export markets and tight credit conditions, offsetting any benefit from the weak pound against both the euro and dollar.

In an attempt to head off the worst of the recession, the European Union yesterday backed calls for a doubling of the IMF's crisis-fighting funds to $500 billion (365 billion) ahead of a key meeting of the G20 group of old and new economic powers later this week.

But the chances of a united approach at the G20 receded last night as the 27 EU nations made it clear they would not support United States demands for greater government spending as a way of heading off global economic meltdown.

The EU's finance ministers met in Brussels ahead of the G20 meeting in London on Friday and Saturday.

And it soon became clear there was a definite rift between Europe and the US over the best way of tackling the crisis.

The EU position on both IMF funding and fiscal stimulus was contained in a document that mapped out the bloc's joint policy stand.

It made clear Europe had no intention, for now, of increasing the fiscal stimuli governments have announced as their contribution to the battle against global recession.

Larry Summers, one of the chief economic advisers to US President Barack Obama, called on Monday for more, but he got a blunt "no way" from the EU.

Jean-Claude Juncker, who chaired the EU meeting, said: "The 16 finance ministers (of the euro zone] agreed that recent American appeals insisting Europeans make an added budgetary effort were not to our liking, given that we are not prepared to go further in the recovery packages we have put forward."

The EU's fiscal stimulus is worth between 3 per cent and 4 per cent of EU gross domestic product (GDP) in all.

Mr Obama's $787 billion stimulus plan for 2009-10 – which will last a little longer in the case of tax cuts – amounts to about 5.5 per cent of the GDP of the US, where the now global crisis began two years or so ago.

Alistair Darling, the Chancellor, used the EU finance ministers' meeting to press for more help for hard-hit central and eastern European countries.

He warned that those economies faced a 2009 funding shortfall of $100 billion.

"This is a time for Europe to build on shared values of co-operation," he said. "Many decades of economic union have brought greater prosperity, but closer economic integration also brings challenges. We are all affected by what happens to our neighbours.

"Our priority must be to support those countries most at risk from the aftershock of the global financial crisis, starting with those on our own doorstep in Europe.

"For those most at risk, we need to increase financing through the International Monetary Fund and multilateral banks, through central banks, and an enhanced lending facility at the EU level."

Mr Darling also called on the G20 group to agree additional support via the IMF when they meet later this week.

Markets clutch at straws as host of nations queue up for life support

Analysis: Bill Jamieson

AS WARNINGS come, they could not be more dire. We are entering, says Dominique Strauss-Kahn, head of the International Monetary Fund, "a great recession", with the world economy likely to shrink for the first time in decades.

And Ben Bernanke, chairman of the US Federal Reserve, chimed in to tell us the world was facing the worst financial crisis since the 1930s.

"Until we stabilise the financial system," he declared, "a sustainable economic recovery will remain out of reach."

What makes these statements so chilling is that they come from leaders and institutions that have always recoiled from making anything other than the most cautious, anodyne statements about economic prospects. They suggest the global policy elite is close to throwing in the towel after months of interest rate cuts, emergency packages and huge fiscal stimuli.

Perhaps because these warnings were so grim, stock markets worldwide leapt on news from US bank Citigroup that it had made a profit in the first two months of the year.

Is "bank makes profit" such a shock? Yes, when you consider this is the first statement from a US bank in months that has not been accompanied by massive write-downs, provisions, black holes and losses with a string of zeroes on the end.

In London the FTSE100 surged almost five per cent, or 172 points, to 3715.23 while on Wall Street the Dow Jones Index was up almost 300 points by mid-afternoon.

The first green shoot? Markets are desperate for any good news to relieve the gloom. Data worldwide testifies to a ferocious slump. Exports in Germany and Japan have collapsed. UK manufacturing output in January tumbled 12.8 per cent from a year earlier, the fastest annual contraction since January 1981. Eastern European countries are sinking under a weight of foreign debt. The IMF is now back as the world's financial emergency ward.

And the casualties are growing by the week. Countries such as Iceland, Hungary, Pakistan, Ukraine, Latvia and Romania are now on IMF life support or have applied for it.

This weekend finance ministers from the G20 major economies meeting in London will roll out a plan to double the IMF's kitty to $500 billion.

Enough? According to World Bank estimates, 129 developing countries face between them a financial shortfall of between $270 and $700 billion. And it is puny compared to the latest estimate for the global fall in value of financial assets: a shattering $50,000 billion.

Only last month the IMF forecast that the world economy would still grow by 0.5 per cent. Now even that meagre gruel is off the table.

Mr Strauss-Kahn warns that world trade is falling at an alarming rate and business and consumer confidence has collapsed. He said: "The IMF expects global growth to slow below zero this year, the worst performance in most of our lifetimes."