However, it is expected to recover only gradually in 2010, growing by 1.9 per cent, the IMF said in its World Economic Outlook report released at its headquarters in Washington.
"Achieving this turnaround will depend on stepping up efforts to heal the financial sector, while continuing to support demand with monetary and fiscal easing," it said.
The IMF said advanced economies experienced an unprecedented 7.5 per cent decline in real GDP during the fourth quarter of 2008, and the output is estimated to have fall during the first quarter of 2009.
It is not only the US which has experienced a sharp downfall, but also other economies of the world too have had the same fate, including the western Europe and advanced Asia, it said. Emerging economies too are suffering badly and contracted four per cent in the fourth quarter in the aggregate.
While there have been some encouraging signs of improvement since the G-20 Summit in London early this month, the report said confidence in financial markets is still low, weighing against the prospects of an early economic recovery.
The April 2009 Global Financial Stability Report (GFSR) estimates write-downs on US-originated assets by all financial institutions over 2007-10 will be USD 2.7 trillion, up from the estimate of USD 2.2 trillion in January 2009. This is largely a result of the worsening prospects for economic growth.
Total expected write-downs on global exposures are estimated at about USD 4 trillion, of which two-thirds will fall on banks and the remainder on insurance companies, pension funds, hedge funds, and other intermediaries, it said.
An important side effect of the financial crisis, the report said, has been a flight to safety and return of home bias, which have had an impact on the world's major currencies. Since September 2008, the US dollar, euro, and yen have all strengthened in real effective terms.
As the World Economic Outlook (WEO) projections assume that financial market stabilisation will take longer than previously envisaged, even with strong efforts by policymakers, the IMF said financial strains in mature markets are projected to remain heavy until well into 2010.
It would improve only slowly as greater clarity over losses on bad assets and injections of public capital reduce insolvency concerns, lower counter party risks and market volatility, and restore more liquid market conditions.
"Even with determined policy actions, and anticipating a moderation in the rate of contraction from the second quarter onward, global activity is now projected to decline 1.3 per cent in 2009, a substantial downward revision from the January WEO Update. This would represent by far the deepest post-World War II recession," the IMF said.
Downturn is truly global, the report said -- output per capita is projected to decline in countries representing three-quarters of the global economy, and growth in virtually all countries has decelerated sharply from rates observed in 2003-07.
Growth is projected to reemerge in 2010, but at just 1.9 per cent would be sluggish relative to past recoveries, it said.
The IMF said this difficult and uncertain outlook argues for forceful action on both the financial and macroeconomic policy fronts. Policymakers must be mindful of the cross-border ramifications of policy choices. Initiatives that support trade and financial partners, including fiscal stimulus and official support for international financing flows-will help support global demand, with shared benefits.
"Conversely, a slide toward trade and financial protectionism would be hugely damaging to all, a clear warning from the experience of 1930s beggar-thy-neighbour policies," it said.
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