The recession gripping the world economy is likely to be unusually severe and the eventual recovery sluggish, the International Monetary Fund (IMF) says.

An analysis of past recessions and their recoveries is “sobering” reading, and commentators are correct in comparing the current downturn with that of the Great Depression, the IMF said on Friday (AEST).

Last month, an IMF report predicted the world economy would shrink for the first time in 60 years in 2009 - by as much as 1.0 per cent - while it expects a modest recovery of between 1.5 to 2.5 per cent growth in 2010.

“The implications of these findings for the current situation are sobering,” the IMF said of the report.

“The current downturn is highly synchronised and is associated with a deep financial crisis, a rare combination in the post-war period.

“Accordingly, the downturn is likely to be unusually severe, and the recovery is expected to be sluggish.”

Australia is yet to formally post two consecutive quarters of economic growth that define a recession, but signs are that the country is facing its first major economic downturn since the 1990s.

The IMF analysis of past recessions found three common themes:

• Recessions in the advanced economies over the past two decades have become less frequent and milder, whereas economic expansions have become longer;
• Recessions associated with financial crisis have been more severe and longer lasting than recessions associated with other shocks, while recoveries from such recessions have been typically slower, associated with weak domestic demand and tight credit conditions;
• Recessions that are highly synchronised across countries have been longer and deeper than those confined to one region, while recoveries from these recessions have typically been weak, with exports playing a much more limited role than in less synchronized recessions.

“It is not surprising, therefore, that many commentators looking for historical parallels for the current episode focus on the Great Depression of the 1930s, by far the deepest and longest recession in the history of the most advanced economies,” the IMF said.

Regarding policy reaction to recessions, it found two main themes:

• That monetary policy seems to have played an important role in ending recessions and strengthening recoveries, but its effectiveness is weakened in the aftermath of a financial crisis;
• Fiscal stimulus appears to be particularly helpful during recessions associated with financial crisis, and is also associated with stronger recoveries. However, the impact of fiscal policy on the strength of the recovery is found to be smaller for economies that have higher levels of public debt.

“This suggests that in order to mitigate the severity of the current recession and to strengthen the recovery, aggressive monetary and particularly fiscal measures are needed to support aggregate demand in the short term,” it said.

“But care must be taken to preserve public debt sustainability over the medium term.”

Still, even with such measures, a return to steady economic growth depends on restoring the health of the financial sector.

“One of the most important lessons from the Great Depression, and from recent episodes of financial crisis, is that restoring confidence in the financial sector is key for recovery to take hold.”

AAP