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Recession Expected To...

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The International Monetary Fund said on Thursday that the current global recession, the worst after World War II, is likely to continue for a longer duration and the recovery would be sluggish.

However, strong countercyclical policy action, combined with action to restore confidence in the financial sector, could improve prospects for recovery, the IMF said as it released the World Economic Outlook.

"The analysis suggests that the combination of financial crisis and a globally synchronised downturn is likely to result in an unusually severe and long lasting recession," said the IMF report, released at its headquarters in Washington.

Observing that this combination is historically rare, and inferences should be drawn cautiously, the IMF said: "Nonetheless, the fact that the current downturn is highly synchronised and associated with deep financial crises suggests that it is likely to be persistent, with a weaker-than-average recovery."

A typical recession, according to IMF, persists for about a year, while an expansion often lasts more than five years. Recoveries from recessions are strong, reflecting the presence of a bounce-back effect. However, recessions and expansions in the advanced economies have changed over time -- since the mid-1980s, recessions have become less frequent and milder, while expansions have become long lasting.

The IMF said macroeconomic policies can play a valuable role in reducing the severity of recessions and bringing forward recoveries. Monetary policy has typically played an important role in ending recessions and strengthening recoveries, although it is less effective during financial crises.

Fiscal policy, the report said, appears to be more reliable in these episodes, consistent with evidence that fiscal policy is more effective when economic agents face tighter liquidity constraints. Fiscal stimulus is also associated with stronger recoveries; however, the impact of fiscal policy on the strength of the recovery is found to be smaller for economies that have higher levels of public debt, the IMF said.

Dealing with the current global recession, the World Economic Outlook 2009 said, will require coordinated monetary, fiscal and financial policies.

"Aggressive monetary and fiscal policy measures are needed to support aggregate demand in the short term. Even with such measures, one of the most important lessons from episodes of financial crises is that restoring confidence in the financial sector is critically important for macroeconomic policies to be effective and for recovery to take hold," it said. The report further said that a coordinated policy response by advanced and emerging economies is required to prevent further escalation and spreading of financial stress.

"Reducing individual country vulnerabilities cannot insulate emerging economies from a major financial shock in advanced economies," it said.

As stronger current account and fiscal balances do little to mitigate the transmission of financial stress from advanced economies in periods of financial crisis, the IMF said they may, however, help dampen the impact on the real sector of emerging economies and help reestablish financial stability and foreign capital inflows once financial stress subsides.