The world economy is in the grip of a severe downturn and may soon sink into recession because of the credit crisis and growing financial turmoil, the International Monetary Fund (IMF) said yesterday.

With the United States, Britain and most of Europe in, or set to go into recession, the IMF issued its bleakest assessment of world prospects for years.

In its biannual World Economic Outlook, the fund said: “The world economy is now entering a major downturn in the face of the most dangerous shock in financial markets since the 1930s. Although a recovery is projected to take hold in 2009, the pick-up is likely to be unusually gradual.”

As governments across the West again stepped up their battle to douse what the IMF calls a global financial firestorm, yesterday's report said that intensifying financial strains were beginning to take a heavy toll on economic activity across the world.

The fund cut its forecast for global growth next year from 3.9 to 3 per cent, not far above the 2.5per cent that it says defines global recession. “Financial conditions continue to be under extraordinary stress. Looking ahead, they are likely to remain very difficult, restraining global growth prospects.”

Yesterday's united move by the US Federal Reserve, the Bank of England, the European Central Bank and other central banks to deliver interest rate cuts across the developed economies was welcomed by Olivier Blanchard, the IMF's new chief economist. But he voiced concern that the latest measures may not be enough to stem the turmoil and stave off world recession.

“Even once such concerted action is taken, the effects will take time and it is clear that there will be tough economic times ahead,” he said. “Under any realistic plan, the re-establishment of trust, and more formally the decline in risk between financial institutions, will take time.”

He said that further, early rate cuts from central banks were likely to be required: “More may be needed; more is needed in particular in Europe at this point.”

There were more signs of emerging problems in some of the economies that have been engines of global growth in recent years. Four leading Chinese steel companies - Shougang Group, Hebei Iron & Steel Group, Anyang Iron & Steel and Shandong Iron & Steel - are to cut production by between 10 and 20per cent.

In Russia, where the tumbling stock market was halted again, thousands of jobs are to go at Magnitogorsk Iron and Steel Works, while Kamaz, the country's leading lorry manufacturer, reduced its working week to four days because of falling demand. Gaz, the carmaker, is stopping production of the Gazel car for four days to reduce stocks.

Recession concerns pushed the price of oil down to near $86 a barrel, a ten-month low. Opec looks set to respond by calling a meeting on November 18, earlier than expected.

Metal prices also fell in a wide sell-off triggered by the concerns surrounding the state of the global economy. At one stage LME copper, a key global indicator of real economic activity, fell 7.1 per cent to its lowest level since March 2006 at $5,227 a tonne.

The IMF expects a recession to take hold of the United States, the world's biggest economy, during this quarter and drag on into early next year. US growth is expected to be only 1.6 per cent this year and to fall to a virtually stagnant 0.1 per cent in 2009 against the 0.8 per cent it forecast in spring.

It added that the US housing downturn is not likely to end until next year and if financial turmoil persists, the housing slump could last into 2010.

The global competitiveness league

Britain's stricken financial system and the growing perception of the Government's inability to manage public money and nurture business has hit competitiveness, according to the latest World Economic Forum rankings. In the latest global report, which combines data with views of senior business people to rank 134 economies, the UK has fallen three places to twelfth, with an index score of 5.3. Two years ago it was in second place and the last time it was outside the top ten was in 2005.

The UK's ratings on issues such as the stability of its financial system and government have fallen significantly, with the confidence in the country rating plummeting from fourth to 44th last year.

The United States retained first place, despite the financial turmoil, scoring well for education and innovation, with an overall index of 5.74. Switzerland held second place, with 5.61, and Denmark headed the Scandinavian nations in third place, with a score of 5.58.

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