Developed countries beware; the world’s economy is heading towards a ‘deep recession’. This financial crisis has the ability to batter economic activity into submission. The International Monetary Fund (IMF) expects the world economy to shrink by at least 0.5%. The IMF released its twice-a-year World Economic Outlook report and things are looking bleak. This is in contrast with their optimistic thinking in the beginning of this year when they had announced that world output would increase by 0.5%.

In the report that the IMF had presented to the G20 (a group of finance ministers and central bank governors from 19 of the world’s largest national economies, plus the European Union), they forecast a shrinking world economy and that advanced economies will have declines of between 3% and 3.5% in 2009. The other predictions are that 2010 will see nearly no growth – 0% to -0.5%.

The G20 as a group is adding 1.8% of their GDP to boost their respective macro economies. The EU, however, is only contributing 1%.

The big fiscal stimulus packages that developed countries are implementing may not do much to boost their flagging economies. The UK’s financial deficit is the biggest among the G20 countries.

The financial crisis should be subdued

The IMF gave developed nations more warnings: their governments should intervene in the economies if they want to avert a bigger crisis. The recession will be worse and more prolonged if governments do not work towards stabilising their economies.

The IMF expects financial turmoil, negative incoming data, and lowered confidence if nothing is done to stabilise financial systems. The economy of Japan may lose the most this year – 5.8%, compared to the EU as a whole – 3.2% – and the US with 2.6%.

The ‘key priority’ is to restore lending but that can only happen if the financial system’s inefficiencies are eliminated.

The Eastern Europe challenge

The biggest challenge is that emerging markets may have restricted access to finance; banks and investors in rich countries could withdraw their money.

Eastern European countries fall into this category, especially the Baltic states: Hungary, Romania and Bulgaria. Emerging countries that rely on cross-border finance will be the hardest hit. Romania may receive a rescue package from the IMF sometime this year.

Countries that rely on manufacturing exports – East Asian countries may fall into this category – are also reeling from the decline in trade. Developing and emerging market countries may grow by 1.5% to 2.5%. These countries are suffering the biggest downward revisions.

Financial boosts to a limping economy

Many countries are trying to cure their banking sectors and they are also trying to boost spending. These two should help to boost the economic growth. The IMF recommended that the G20 countries spend 2% of their GDP on their fiscal stimulus programmes; G20 countries will spend 1.8%.

Fiscal expansion in 2009 will add a 2.4% boost to GDP and 2% to world growth. Depending on whether the IMF adds China and India’s figures to their calculations, we could see seven million new jobs this year.

This year we could have 150,000 people (pdf) declaring themselves insolvent in England and Wales, according to Government’s Insolvency Service. This personal insolvency will either be in the form of bankruptcy or an Individual Voluntary Arrangement (IVA).

The numbers for last year were lower – 104,573 and 2004 had the lowest amount of bankruptcies and individual voluntary arrangements – 46,650.

People who have limited financial knowledge and even fewer resources, are most vulnerable: they are in debt but are forced to spend on credit to see to their everyday needs.

Our debt is reaching high levels

KPMG, one of the largest professional services, recently conducted research revealing creditors may have wrote off more than £1.1bn in 2008. The average IVA proposes to repay £18,164, which is a 38 per cent debt repayment of the average debt of £47,800.

There is a slight difference between these new figures and the figures from 2007. Most of these debts are from credit cards and loans that pay for day-to-day expenses. KPMG estimates that about 2,500 people received IVA agreements in 2008 despite their debt exceeding £100,000.

KPMG’s director of personal insolvency, Mark Sands, said that many people are unable to make repayments on their debt; the amount of money they owe is just too big. He also said that formal

New plan to help debtors

The government will introduce Debt Relief Orders in April 2009. These should benefit debtors who have debts of less than £15,000 and who have few assets to avoid bankruptcy.

Become better at your job, in fact, try to become indispensable. This could help if your employer decides to start making redundancies. You can’t afford to be without a job during this bad phase in the economy.

Complete your degree if you haven’t already done so. One of the best investments is in you, so consider investing more into your education.

Take steps to reduce your debt. These steps needn’t consume your entire paycheck. You could start with the smallest debt and work your way up or tackle the one with the highest APR first. Get into the habit of writing down everything that you buy and make sure that these support your goals.

What are your goals? Think of a few that you wish to achieve this year. Write them down and think about them every day but make sure they are measurable. For example, you could make saving for house deposit as one such goal. And can track how much you have progressed with an Excel spreadsheet.

Why buy new things when you can use what you have? You can apply this to clothing, vehicles, electrical appliances and gadgets. You don’t need to buy the newest iPod nor do you need to buy a new laptop every two years. Try to go without buying the newest and brightest and learn to be content with, and enjoy what you have.

Are your savings healthy, or are they languishing in some forgotten account? Your savings should do the hard work, especially if you’re still young. Invest a little time to learn more about the stock market and other investment options. See a financial advisor who can give you unbiased advice. Make your money work hard so that you will be able to retire in comfort.

There are a few saving types you may need. Two of these are a retirement account and an emergency fund. Your retirement account will be used when you reach retirement age; your emergency fund will be used when you need money unexpectedly. This will save you from taking out loans and it’ll also save you the worry of not knowing where to get the money you need so desperately.

How much entertainment do you need? Do you need unlimited broadband, a cable television subscription and a DVD rental account? Perhaps you could eat out a few times less or switch to a cheaper television subscription. There might be more things that you can live without. Find them and save that money, or put it towards your debts.

What bank charges are you paying? Do you budget for these charges, or do you forget that they exist? Make sure that you are not paying too much for the privilege of banking. You could negotiate some of the charges with your bank. You could swap to a different bank if your bank is unwilling to lower certain fees.

Make a list of all the things you need to pay this year: utility bills, insurance, monthly debit orders, and subscriptions. Think of ways to save money on electricity and water. Try to reduce the amount of monthly debit orders by paying the full yearly fee instead, if your finances allow.