An official with the International Monetary Fund offered a disheartening diagnosis of the health of the global economy during a presentation in Red Deer on Thursday.
But Doug Laxton, head of the IMF’s economic modelling unit, also issued a prescription for recovery.
Laxton was speaking to members of the Alberta Agricultural Economics Association during its annual Visions conference.
A Canadian who worked at the Bank of Canada for more than a decade before joining the IMF in 1993, he confirmed that the world is in the grips of a “very severe recession.”
“It’s going to be the biggest one since the Great Depression,” said Laxton, noting that economic numbers for the last two quarters were “disastrous,” with a crash in industrial production and a collapse in exports.
“Some people described those quarters as almost like a free fall in economic activity.”
In a presentation that made liberal use of graphs and charts, he predicted that the situation will remain bleak through 2009 and into 2010.
“The recovery, at this point, looks like it’s going to be very gradual.”
The financial sector must first regain its health and governments must intervene with policies that deter deflation and encourage growth in aggregate demand, said Laxton.
“The last thing that you want to have is a situation where you lose the tax base because the economy contracts.”
With central banks already pushing policy interest rates as low as they can go, other instruments are required, said Laxton.
He described the process of quantitative easing, which involves buying up long-term securities to keep rates down.
On a positive note, recent numbers out of China and other advanced countries suggest that economies could be stabilizing, said Laxton.
Asked about increased regulation of financial institutions, he said such action is expected.
“A laissez-faire attitude towards financial regulations is obviously out the window.”
Laxton challenged a suggestion that printing money and increasing government oversight of the economy haven’t been effective policies in the past.
“I think the world economy has done pretty well over the last 50 years.”