IMF warns recession will be 'unusually long-lasting'

• 65% of the world's countries are in recession
• Developing countries will be starved of resources

• Heather Stewart
• guardian.co.uk, Thursday 16 April 2009 15.49 BST
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More than half of the world's countries have been plunged into recession by the credit crunch, a higher proportion than at any time since 1960, according to the International Monetary Fund, which warns today that the downturn is likely to be "unusually severe and long-lasting", and will starve developing countries of resources.

As the world's finance ministers prepare to descend on Washington for the IMF's spring meetings next week, it offers a stark warning to politicians who claim to have spied green shoots.

"The combination of financial crisis and a globally synchronised downturn is likely to result in an unusually severe and long-lasting recession," the IMF says, in two key chapters of its twice-yearly World Economic Outlook, published today.

The IMF was given a major role in rebuilding the global economy after the crash at the G20 summit, when world leaders agreed to triple its resources, to $750bn (£503.4bn).

Comparing today's downturn to 15 recessions over the past 50 years, the IMF finds that downturns following financial crises tend to be longer-lasting, and the subsequent recovery is often weaker, as battered banks rebuild their balance sheets.

When many countries are involved, plunging into recession simultaneously, downturns also tend to be longer. This time, it finds that 65% of the world's countries are in recession – more than at any other time since 1960.

This toxic combination of banking collapse and synchronised recession leads the IMF to predict that the current recession is likely to be particularly painful, and it urges rich and poor countries to work together to build a co-ordinated response, instead of tackling crisis-hit countries one by one.

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

Emerging European countries such as Hungary, the Czech Republic and Ukraine are identified as particularly vulnerable, as the credit boom of the past decade turns to bust. Western banks expanded aggressively into these economies and, between them, emerging European countries have debts worth more than half the region's GDP.

With banks in rich countries now battling for survival, the IMF predicts that developing economies may face shortages of investment for years to come.

"The decline in capital flows to emerging economies following a crisis may be protracted, given the solvency problems facing advanced economy banks who provide significant financing to emerging economies."

The IMF will produce more detailed forecasts for individual economies when it releases the full World Economic Outlook next week; but it has already predicted that the UK, with its large financial services sector, will be hit very hard.