A very sobering outlook at the economic present and future based on IMF and OECD expectations

International organisations have been competing for the ears of the Group of 20 leaders this week, yet their message has been the same: the economic backdrop to the summit is grim; the recession is now global; it is deep; and it threatens to be prolonged.

The International Monetary Fund expects global economic output to fall this year by 0.5 per cent to 1 per cent, the worst performance since the second world war.

What began in the US and turned last autumn into a crisis of confidence in advanced countries has morphed into a dangerous global recession. At its heart lies a vicious circle, with financial fragility bringing pain to the real economy, and rising unemployment and falling incomes exacerbating vulnerability and spreading it to more banks and other parts of the global financial system.

The World Trade Organisation expects trade flows to fall 9 per cent this year and the collapse in manufacturing exports has hit economies that rely on such products especially hard, such as Japan, South Korea and Germany.

A stock cycle where manufacturers curtail production while inventories are reduced suggests a recovery will be delayed until later this year at the earliest, but forecasters still expect a recovery to come then or early next year.

One reason for a recovery is what Mervyn King, the Bank of England governor, describes as the "Honda effect". The Japanese car manufacturer mothballed its UK factories late last year as it struggled to sell cars across Europe, hitting UK manufacturing output hard. But once it and other manufacturers reopen factories output is expected to jump.

The OECD believes that, during 2010, advanced economies will grow by 1.1 per cent, with similar expansions in all rich countries. The World Bank expects developing nations to grow by 4.4 per cent in 2010, compared with growth of only 2.1 per cent this year and growth rates well in excess of 5 per cent in recent years.

While there is no doubt that the forces for recovery are powerful, risks remain. Dominique Strauss Kahn, managing director of the IMF, told the Financial Times on Wednesday he expects recovery during the first half of 2010, "but the big ‘if’ is the speed of the cleaning up of [bank] balance sheets".. One particular fear haunting the G20 is that an implosion in eastern Europe infects Austrian, Swedish, Italian and Belgian banks with bad loans, providing a downward spiral of losses, retrenchment and economic contraction.

But whatever the depth of the recession, eyes are looking at the problems of recovery and exit from the extraordinary policies of recent months.

For advanced economies, fiscal positions, never strong in the past decade, will enter the next decade much weaker, just as demographic pressures of ageing begin to weigh more on the working-age population. If inflation is to be avoided, there needs to be tight public expenditure growth and tax rises.

There is no sign that the dangerous global imbalances that helped cause the crisis are any closer to resolution. The world must find a way of growing without big US trade deficits and associated surpluses in China, Germany and oil producers.

Labour market policies will come to the fore as countries must reduce unemployment from levels they had hoped never to see again. And while the focus is on preventing deflation, the considerable monetary stimulus must be removed as economies recover to avoid a slide into inflation.

Copyright The Financial Times Limited 2009

Concern is widespread that recession will aggravate the financial crisis

Another is that pain in residential mortgages will spread to US commercial property loans, where defaults have been lower than in the early 1990s recession.