Collapse in world trade says IMF

Collapse in world trade says IMFDavid Uren, Economics correspondent | January 29, 2009

WORLD trade collapsed by nearly 45 per cent in annual terms in the final three months of last year, according to new International Monetary Fund figures that expose the staggering depth of the global financial crisis.

And the IMF has predicted dealing with the economic storm will force governments to drive their budgets deep into deficit, indicating that Australia could expect a $35 billion deterioration in its budget bottom line.

The bleak assessment, released early this morning, declares the global economy is in the grip of a "pernicious feedback loop" triggered by the collapse of credit and stock markets and warns there will be no recovery until governments take forceful action to restore confidence in financial markets.

"Downside risks continue to dominate, as the scale and scope of the current financial crisis have taken the global economy into uncharted waters," the report says.

Falling share and property prices are forcing businesses and households to cut their spending, while new credit has been choked.

"Global output and trade plummeted in the final months of 2008," it says.

The advanced countries are expected to produce 2 per cent less this year than last year, with world trade volumes to drop by 2.8 per cent.

"Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy," the IMF report says.

It calls upon nations to co-ordinate their economic rescue packages. Kevin Rudd held his first direct conversation with US President Barack Obama yesterday morning to discuss the crisis.

Wayne Swan said yesterday that figures detailing the extent of the downturn late last year were only just now being released, but said the Government was prepared to act. "One of the things that this Government does is that it gets ahead of the game," the Treasurer said.

Mr Swan said that, although Australia's economy was better placed than most countries, it could not resist the pull of international forces.

"Against the sobering backdrop of a global recession and collapsing commodity prices, it is inevitable that Australian jobs and growth will be affected," he said.

The IMF stresses the importance of government action to reverse the economic slide. It says growth could start to recover late next year, with 3 per cent world growth possible.

"The outlook is highly uncertain, and the timing and pace of the recovery depend critically on strong policy actions."

The IMF says that timely budget stimulus packages had to provide a key support to world growth, with any delays likely to worsen prospects. It says such packages should be temporary and allow for deficits to be eliminated once conditions improve.

The IMF acknowledges that countries face a dilemma in responding to the crisis, as budget stimulus packages run the risk of generating unsustainable budget deficits. However, it says there is a risk that the world economy would be even worse than forecast unless "stronger financial strains and uncertainties are forcefully addressed."

The IMF forecasts that advanced countries will average budget deficits equivalent to 7 per cent of GDP this year.

In Australia, that would be equivalent to a deficit of around $80 billion, out of a total budget of $300 billion.

Australia's deficit will not sink that far, as its starting point is much better than most other developed countries, however, the IMF calculations suggest that a $35 billion deterioration in the budget bottom line should be expected.

The IMF says the threat of inflation has disappeared under the weight of the global downturn, and is now being supplanted by a risk of deflation.

Australia's consumer price index fell by 0.3 per cent in the December quarter, its biggest drop in 11 years, because of the sharp fall in oil prices.
The underlying rate of inflation, which takes out extreme movements and is tracked closely by the Reserve Bank, rose by 0.75 per cent in the quarter, which, if sustained, would get inflation back to the target band of 2per cent to 3 per cent.

Mr Swan confirmed that inflation was no longer the Government's main economic concern.

"The balance of risk globally as well as here changed from fighting inflation on the one hand to supporting growth and jobs on the other."

Financial markets expect the RBA will focus on the rapid deterioration of the global economy in deciding on another large rate cut at its board meeting on Tuesday.

Westpac interest rate strategist Damien McColough said financial markets expected the bank to lower the official rate by between 0.75 and 1 percentage point. If passed through to home buyers, it would reduce mortgage rates below 6 per cent for the first time in nearly 40 years.

Mr McColough said the growth outlook for both the world and the Australian economies had worsened significantly since the last RBA meeting early last month.

The biggest downgrade in the IMFs forecasts were for the "newly industrialised" countries in Asia, which include key markets for Australia such as Korea and Taiwan. They are expected to contract 3.9 per cent this year; the IMF was tipping 2.1per cent growth last November.

The crucial Chinese economy is expected to grow 6.7 per cent, down from an earlier forecast of 8.3 per cent, while Russia will slump to a 0.7per cent contraction.

Commodity prices will continue to fall, with oil prices tipped to almost halve, while "non-fuel" commodity prices will drop 29.1 per cent.