IMF Sees $2.2 Trillion in Losses Slowing World Growth (Update2)

Jan. 28 (Bloomberg) -- The global economy will slow close to a halt this year as more than $2 trillion of bad assets from the U.S. help sink economies from Russia to the U.K., the International Monetary Fund said.

Bank losses worldwide from toxic U.S.-originated assets may reach $2.2 trillion, the IMF said in a report released today, more than the $1.4 trillion that the fund predicted in October. World growth will be 0.5 percent this year, the weakest postwar pace, the fund said in a separate report.

The reports signal that writedowns and losses at banks totaling $1.1 trillion so far are only half of what’s to come and that contractions may deepen. Losses on that scale would leave banks needing at least $500 billion in fresh capital to restore confidence in their balance sheets, the IMF said.

“Unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth,” the IMF said.

The IMF’s latest forecast revises its estimate of world growth down from 2.2 percent in November.

U.S. gross domestic product will contract 1.6 percent, Japan’s will shrink 2.6 percent and the euro area will decline 2 percent in 2009, the IMF said. The fund in November foresaw a 0.7 percent U.S. contraction, with declines of 0.2 percent in Japan and 0.5 percent in the euro zone.

Leading the Group of Seven nations in contraction this year will be the U.K. economy, which the IMF predicted would slide 2.8 percent, compared with the fund’s forecast in November for a 1.3 percent drop.

‘Standstill’

Global growth this year will come to a “virtual standstill,” said Olivier Blanchard, the IMF’s chief economist, in a press conference in Washington. “We need stronger policy on the financial front.”

In the U.S., President Barack Obama is negotiating with Congress on a plan worth $825 billion that includes tax cuts and spending projects to pull the world’s largest economy out of a 13-month recession.

The Federal Reserve meets today in Washington to decide how to use emergency credit programs, rather than interest rates, to arrest the financial crisis.

The European Central Bank has cut its benchmark interest rate by more than half since early October to 2 percent, matching a record low. Governments are also beginning to ease fiscal policy as the 16-nation euro-region suffers its worst recession since the single currency began trading a decade ago.

Timely Stimulus

Advanced and developing countries need to be “even more supportive” of demand than they already have been, with lower interest rates and fiscal stimulus, the lender said. The fund urged “timely” passage of fiscal aid, saying “any delays will likely worsen growth prospects.”

The Obama administration and federal regulators are considering setting up a “bad bank” that would absorb illiquid assets from otherwise healthy financial firms.

The IMF said “the restructuring process might involve the use of a publicly owned ‘bad bank’ to remove distressed assets from the balance sheets of institutions.” Governments should “move expeditiously toward recapitalization” and disposal of bad debt, the IMF said.

The fund said that banks needed at least $500 billion of new cash “just to prevent their capital position from deteriorating further.”

Hedge Funds

Hedge funds may have halved in size in the last three months of 2008, the fund said, dragged down by a combination of asset-price declines and investors withdrawing their money. Such a decline was “a particular concern for those markets in which hedge funds provided a significant proportion of market trading liquidity,” the IMF said.

“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 said. “A sustained economic recovery will not be possible until the financial sector’s functionality is restored and credit markets are unclogged.”

China’s economy will likely expand 6.7 percent this year, the IMF said, reducing its estimate for the world’s fastest- growing major economy from 8.5 percent in November. Russia will contract 0.7 percent this year, compared with a 3.5 percent expansion the IMF predicted in November, today’s report showed.

Inflation Outlook

The IMF report said inflation in advanced economies may fall to a record low of 0.3 percent this year, from a prediction in November of 3.6 percent. The average price of oil may be $50 a barrel this year, the IMF said, less than the $68 a barrel forecast it made three months ago.

Companies around the world are cutting workers by the thousands, raising the risk of even weaker consumer spending.

Walldorf, Germany-based SAP AG, the world’s biggest maker of business-management software, said today it will slash more than 3,000 jobs this year. Earlier this week Caterpillar Inc., Sprint Nextel Corp., Home Depot Inc. and ING Groep NV led companies announcing at least 74,000 job cuts as sales withered amid the global economic recession.