By David Lawder and Lucia Mutikani
WASHINGTON, Dec 18 (Reuters) - The global economy will contract in 2009 for the first time in the post-1960 period, dragged down by recessions in the United States, the euro zone and Japan, the Institute of International Finance said on Thursday.
The IIF, an association of financial services firms with 400 members worldwide, forecast global output falling 0.4 percent in 2009 from an estimated 2.0 percent expansion this year.
"This is shaping up to be the most severe globally synchronized recession in modern economic history," IIF Managing Director Charles Dallara told a news conference. "It requires a globally coordinated approach.
Real gross domestic product in the United States, the epicenter of a devastating financial crisis, was forecast to drop 1.3 percent in 2009, while euro zone GDP was seen falling 1.5 percent.
U.S. GDP growth was forecast at 1.2 percent this year, with the euro area's expansion pace estimated at 0.9 percent.
The IIF predicted Japan's economy would shrink by 1.2 percent next year, while no growth was seen this year.
The biggest GDP falls will come in the fourth quarter, with the United States down 5.0 percent and both the euro area and Japan down 3.0 percent. The United States will return to 2.5 percent growth by the third quarter of 2009, the group predicted, while the euro zone will continue to see shrinkage through the year's first three quarters.
Dallara stressed the need for the world's major economies to adopt coordinated monetary and fiscal stimulus measures to ensure that actions taken by one nation do not adversely affect others and to "get more bang for the buck" from spending measures.
BAD ASSET PROGRAM NEEDED
Major financial institutions now appear more stable than in October, IIF officials said. But they noted that this is due largely to central bank liquidity measures and government guarantees for interbank lending.
More case-by-case capital injections may be necessary, and the United States should consider another program to remove bad assets from bank balance sheets, they said.
U.S. Treasury Secretary Henry Paulson recently decided to scrap a plan to purchase toxic mortgage-related assets under the $700 billion financial rescue program, opting instead to continue equity injections and hold funds in reserve for emergencies. Some of the funds may be used to aid Detroit automakers.
But Hung Tran, senior director of IIF's capital markets and emerging market policy department, said the capital injections will not be enough as a weakening economy increases credit losses and puts more pressure on bank balance sheets.
Until bad assets are taken off their books, questions over potential losses will continue to put financial institutions under stress, Tran said.
"We will not restore the banks and strengthen the banking system until we get both the economy and the troubled asset markets stabilized," he said.
A program to remove bad assets could take the form of a revived Treasury auction process, or a government "bad bank" structure to assume bad debts for the long term, Dallara said.
The IIF forecast that emerging market economies will grow around 3.1 percent in 2009, braking sharply from an estimated 5.9 percent expansion this year.
China's GDP growth would probably slow to 6.5 percent next year from an estimated 9.3 percent pace in 2008, the association said.
It forecast crude oil prices averaging $55 per barrel next year. (Reporting by Lucia Mutikani and David Lawder)