IMF calls for 'forceful action'

The International Monetary Fund has pushed for developed countries to take "forceful action" to ensure the global economy can begin to recover in 2010 - but has said there are limits to what domestic policy measures can achieve in New Zealand.

The IMF's World Economic Outlook projected the global economy would shrink by 1.3 per cent this year - the first time it had declined since World War II. Growth was projected to re-emerge next year but would be "sluggish" compared with previous recoveries.

New Zealand's GDP was expected to decline by 2 per cent this year before picking up in 2010 to grow by 0.5 per cent.

By comparison, Iceland's economy was forecast to shrink by 10.6 per cent, the United Kingdom by 4 per cent and the United States by 2.8 per cent.

The report called for "forceful action" from developed countries to ensure a rebound.

IMF chief economist Olivier Blanchard said even in 2011 economies would "not be back to normal" and governments should begin plans for infrastructure spending now.

However, the report said there were limits to what domestic policy measures could achieve in New Zealand because of its dependency on overseas demand - particularly from the United States and Asia - and its high levels of external debt.

A spokesman for Finance Minister Bill English said the Government had known the economic situation was deteriorating but noted the report pointed to New Zealand's robust fiscal position.

"As a small trading nation, of most interest to us in the report is the gloomy outlook for the world economy. That gloomy outlook means there is even more urgency for New Zealand to take steps to lift its own economic growth."

The report said conservative fiscal and monetary policy had left New Zealand better placed than most to cope with the drop in demand and "substantial" fiscal stimulus had already been provided.

In a pre-Budget address on Wednesday, Mr English said New Zealand's fiscal stimulus package would total about 5 per cent of GDP for this year and next year - one of the highest levels in the world.

He warned that further big spending was off the table, saying the Budget would require "trade-offs" as the Government tried to keep debt under control. Future tax cuts are being revised.

Mr English said the recession was expected to take about $50 billion out of New Zealand's economy and while there would be new Government spending, it would not increase as fast as in the past 10 years.

Act's Roger Douglas said Mr English was paying "lip service" to the need for restraint.

"Rather than cutting spending and taxes, Mr English is reneging on tax cuts and increasing spending. For a man who is supposedly willing to make the tough trade-offs, he's picking the soft options."