IMF Managing Director Dominique Strauss-Kahn

The worst of the financial crisis may still lie ahead and more major financial institutions may face trouble in coming months, IMF Managing Director Dominique Strauss-Kahn said on Wednesday. His deputy John Lipsky said on Thursday, the "storm can be weathered without a damaging global recession...the turmoil is one reason why we expect the recovery to be only gradual."

"IMF projections indicate a decline in global growth to about 4.0 percent in 2008, reflecting the slowdown in the United States, Europe, and Japan and some deceleration of growth in most emerging market and developing countries," Strauss-Kahn said.

"We continue to anticipate a gradual global growth recovery in 2009, although the weekend's developments represent a potential added risk to the outlook,"he added.

In a statement issued after a Gulf Cooperation Conuncil meeting in Jeddah, Saudi Arabia, Strauss-Kahn said that since the last GCC talks"the difficulties in the US financial sector have adversely affected global growth prospects."

"The roots of the crisis are behind us, the roots being the fall in housing prices. The consequences for some financial institutions are still in front of us. We have to expect that there may be in the coming weeks and coming months other financial institutions with some problems," Strauss-Kahn said.

The International Monetary Fund forecast growth of 3.9% in 2008, according to briefing prepared for a meeting of the G20 developing nations in late August.

IMF First Deputy Managing Director John Lipsky, said in a speech in Washington DC on Thursday, that there is now almost universal consensus that the global economy is set to weaken, with the debate shifting from whether emerging economies would decouple from the advanced economies to whether the slowdown will be shallow and somewhat protracted or deep and very long.

"While the events of the past week underscore the seriousness of the situation, my message is today straightforward: this storm can be weathered without a damaging global recession, but attaining such an outcome will require clear and coherent policy responses from public authorities and institutions around the world, together with the restoration of private market functionality and an end to investors' spiraling crisis of confidence," Lipsky said.

Most of the world's developed countries are at an economic standstill or on the brink of recession and policy-makers need to take aggressive action to avert a deep global downturn, Lipsky said.

"Nearing the end of the year's third quarter, most advanced economies are either virtually stagnant or on the verge of recession, while underlying inflation risks are becoming increasingly well-contained," he said and added "A more systematic approach may be needed to deal with such basic issues as the disposition of distressed assets, the degree of protection offered to depositors, and the scale and scope of liquidity support that is offered to institutions and markets."

Lipsky said that according to IMF analysis, the most likely outcome is that the financial turmoil still underway in many advanced economy markets will not by itself prevent a gradual recovery in economic activity in 2009.

Nonetheless, the turmoil is one reason why the IMF expects the recovery to be only gradual.

"At the same time, the moderate growth we expect will not be sufficiently powerful to quickly end the deleveraging and sector shrinkage afflicting financial institutions in many key markets. Furthermore, the dangers created by the financial crisis still represent the principal risk to near-term growth prospects," Lipsky said.

Meanwhile, the Financial Times reports today that the global financial crisis has spurred the German government to push for more regular contact between governments and commercial banks, and more public scrutiny of what national authorities are doing to respond to market risks.

In a letter sent last week to the six other members of the Group of Seven leading industrial nations, the finance ministry called for the 12-nation Financial Stability Forum, which includes a host of international bodies, to “more systematically consult with market participants”.

The forum’s remit to spot trouble and co-ordinate action should be supported by analyses by the International Monetary Fund of “spill-over risks” and those that may arise from “innovations in financial markets”.

The paper, co-authored by the Bundesbank and seen by the FT, says the IMF and FSF should produce an annual report – about risks, policy options and countries’ progress in adopting them – that would go to governments and the public.