WASHINGTON, Jan 28: The International Monetary Fund on Wednesday forecast the world economy would slow to a near standstill this year, warning that deflation risks were rising and saying toxic assets need to be removed from the banking system.

It cut its forecast for global growth in 2009 to a slight 0.5 per cent, the weakest since World War Two, from a November estimate of 2.2 per cent.

“Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy,” the IMF said in an updated forecast.

“A sustained economic recovery will not be possible until the financial sector’s functionality is restored and credit markets are unclogged,” it added.

The outlook was even worse for advanced countries such as the United States and the eurozone, whose economies are seen contracting by 1.6 per cent and two per cent, respectively.

The IMF said emerging market economies would be the only source of growth, expanding 3.3 per cent in 2009 and five per cent next year, but those forecasts as well were below projections made less than three months ago.

The Fund said it expected the world economy to gradually recover in 2010 and growth to resume to around three per cent.Japan’s economy would shrink by 2.6 per cent in 2009 instead of the mild prior estimate of 0.2 per cent. The world’s second-largest economy would be in recession for the second consecutive year, following a 0.3 per cent contraction in 2008.

The 27-member eurozone economy would hit a wall, suffering a two per cent contraction after growing one per cent in 2008. The previous 2009 estimate was for a 0.5 per cent contraction.

Germany, Europe’s biggest economy, would shrink by 2.5 per cent this year after a 1.3 per cent expansion in 2008, according to IMF figures published six days ago.

Britain would suffer the most, with gross domestic product (GDP) activity contracting 2.8 per cent, after 0.7 per cent growth last year.

Of the major advanced economies, Canada would be the least affected, hit with a 1.2 per cent contraction.

Developing countries were forecast to have relatively weak growth of 3.3 per cent in 2009, about half the 6.3 per cent expansion of last year.

China would remain the world’s fastest-growing economy, putting in a 6.7 per cent pace, down from nine per cent in 2008.

India’s economic growth would slow to 5.1 per cent after 7.3 per cent.—Agencies