As the world's bankers prepare to meet in Washington this weekend for the annual meeting of the International Monetary Fund (IMF), most analysts agree this will be its most important gathering since the multinational institution was first mooted at Bretton Woods in July 1944. "The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s," said economists in the World Economic Outlook, the IMF's annual report on the global economy released late Wednesday night.
The IMF now projects that the world's economy, which grew by five per cent last year, will slow to 3.9 per cent this year. It is forecast to weaken even more - to just three per cent - next year, marking the worst showing since 2002. But the IMF dismissed any idea that the global economy would be caught in a prolonged downturn. "I believe that the risk of a Great Depression is nearly nil," said Olivier Blanchard, the chief economist of the IMF.
The economy of the US, which grew by two per cent last year, is projected to slow to 1.6 per cent this year. Growth next year would be negligible, barely budging at just 0.1 per cent. That would mark its worst performance since 1991, when the country was pulling out of a recession. "With a recession now looking increasingly likely, the key questions are how deep will the downturn be, when will a recovery get under way and how strong will it be?" said Mr Blanchard.
Whether it was the IMF's warning that the US would slide into recession, or the slew of rate cuts, or even the US Treasury secretary Henry Paulson's comments that other banks would fail, something sparked a stock market rally yesterday. After falling by nearly 10 per cent on Wednesday, the Nikkei at least stopped falling any further. The Bank of Japan injected ¥1.8 trillion (Dh65.3bn) into the money markets in an effort to calm fears. After being up most of the day, the index ended down 45.83 points to close at 9,157.5. Hong Kong's Hang Seng index added 3.3 per cent after its central bank announced a half a percentage point cut to its interest rate, taking it to two per cent. South Korea's stock market also climbed after the central bank announced an interest rate cut of a quarter of a percentage point.
A relief rally in the UAE was not able to mask the falls in banking stocks amid concerns they are still suffering from falling deposits. Following yesterday's 0.5 per cent interest rate cut, the Dubai Financial Market (DFM) and Abu Dhabi Securities Exchange (ADX) both posted gains. The DFM rose 3.67 per cent while the ADX grew 0.96 per cent. On the financials-dominated ADX, the banks pulled down the rest, with First Gulf Bank falling 7.17 per cent to close at Dh 10.35, while Union National Bank plunged 8.59 per cent to close at Dh 4.15.
Aldar's shares fell 9.7 per cent to close at Dh5.49, their lowest since May 6 last year and taking the annual decline to 55 per cent. Yesterday Bahrain, which like all GCC countries except Kuwait pegs its currency to the dollar, lowered its key interest rates. In contrast, Qatar's Central Bank said it would not be cutting rates. "We don't see a need for us to change our interest rate," said the director of the department of economic policy at Qatar's central bank in Doha.
"The Fed is responding to an issue they are dealing with, [but] we don't have the same problem here. We are following and watching our banking system very closely, and our economic system, and if there is a need we will take appropriate action." According to the World Economic Forum's Global Competitiveness Report, GCC countries are on an upwards curve. The UAE confirmed its position as one of the most competitive economies in the region, moving up six positions to 31st place.
"The country improves its ranking... with a more stable macroeconomic environment and a better assessment of the quality of the educational system," said the report. "The country's institutional environment remains a competitive advantage, characterised by a low regulatory burden, high public trust in politicians and reliable police services." In Europe, markets were muted, although a revival in banking shares helped to push the UK's FTSE 100 Index higher initially, although it closed down 1.2 per cent. France's CAC 40 was down 1.5 per cent and Germany's DAX down 2.5 per cent. In the US, the markets were relatively calm at the outset, but there was some concern as to what effect the resumption of short selling would have.
One world leader, at least, is not planning to be in Washington this weekend. The Venezuelan president Hugo Chavez blamed the international financial system and the IMF for the global financial crisis, and called on the international economic group to disintegrate. "The IMF should not say a word... the IMF should dissolve itself," he said. * additional reporting by Andrew Foxwell and agencies @Email:rwright@thenational.ae