No turnaround until 2010 is seen as confidence drops worldwide.

SAN FRANCISCO, Kalifornia - January 4, 2009 - The outlook for the world economy has clearly worsened over the past two months, hurt by a simultaneous drop in business and consumer confidence around the globe, Olivier Blanchard, the International Monetary Fund's chief economist, said Saturday.

In a presentation to the American Economics Association, Blanchard spelled out his latest views on the global recession.

The IMF's updated official forecast, to be released later this month, "is going to be more pessimistic" than the prior outlook, which was released in November, said Blanchard.

In that forecast, the IMF said world output would slip into recession, growing at only a 2.2% rate in 2009, down from 3.7% pegged for 2008.

Since that forecast was completed, the global economy has been hit by two negative factors that surprised IMF researchers, said Blanchard.

One factor is a sharp drop in export growth for emerging economies. But in addition, business and consumer confidence has simply evaporated.

"The striking fact is you see a drop in consumer confidence and business confidence in all the countries of the world," said Blanchard.

"Sometime in October and November, the perception that there was a big financial crisis had an enormous impact on confidence," he said. "This was psychological to a large extent ... but it is really explaining the drop in activity."

Fear of another Great Depression has been released and consumers and businesses have responded by slamming on the brakes.

Governments "must make clear commitments to do whatever it takes to avoid" such a calamity, he said. He added that the governments of the world's leading nations should enact stimulus packages. In general, these plans should total about 2% of each country's GDP.

The outline of President-elect Barack Obama's stimulus plan is "very much in that range," he said. But Blanchard said he was not endorsing the Obama plan. "I do not know the details," he said. The lack of savings by the richest countries during the boom years has "narrowed the margin of maneuver" for fiscal spending.

But fiscal stimulus is still the order of the day.

"When there is a fire, there is a fire," and fiscal spending must help put it out, said Blanchard.

The spending must be structured so it does not destabilize debt in the long run, he added.

And the plans must not focus on tax rebates. "The spending must be better than sending checks," he said. "In a wait-and-see environment, just giving generous tax cuts is not going to do much. People are just going to wait and save," said Blanchard.