World economy seen in severe recession

By Lesley Wroughton

WASHINGTON (Reuters) - The International Monetary Fund on Wednesday slashed growth forecasts for every major country and urged governments to take forceful action to ensure the world economy's recovery from a severe recession.

In its latest World Economic Outlook, the IMF said the global economy would likely contract 1.3 percent this year in the deepest post-World War Two recession by far.

Growth is set to re-emerge at a sluggish 1.9 percent next year but the pick-up depends on aggressive measures to repair a poorly functioning financial system.

"The longer this goes on, the longer and the deeper will be the recession," IMF chief economist Olivier Blanchard told a news conference.

Just three months ago, the IMF had projected global growth of 0.5 percent, although last month it warned of a deep recession.

The Washington-based institution said it revised its forecasts downward because financial markets appear likely to take longer to stabilise than it had thought earlier.

"A key concern is that policies may be insufficient to arrest the negative feedback between deteriorating financial conditions and weakening economies in the face of limited public support for policy actions," the IMF said.

The IMF said on Tuesday that banks and other financial institutions around the world faced losses which could amount to $4.1 trillion (2.8 trillion pounds). It said banks would likely need to raise $875 billion in fresh capital.