Most markets in the developed world have rallied sharply since hitting the lows in March this year.For example, the S&P 500 is has rallied 40%  from March lows as of yesterday. Fed officials and many others have been talking up the economy and there have been talk of “green shoots” appearing in the economy.Some economists are projecting a recovery in the second half of this year.

Despite rallies in the stock markets and talk of recovery, the recent Global Financial Stability Report by IMF states that economies of the developed world will experience a deeper protracted recession due to further deterioration in residential and commercial real estate markets, tight lending conditions and rising defaults in  corporate and consumer loans.

Futures are pointing to further declines in the US and UK residential mortgages of  both prime and subprime loans. Loan workout programs and foreclosure moratoriums have failed to reverse the decline in the housing market. The charge-off rates in residential real estate market in the US is projected to peak in late 2010. Commercial mortgages are projected to follow the residential markets and has already begun to worsen in the US and UK.

Source: Global Financial Stability Report, Responding to the Financial Crisis and Measuring Systemic Risks, April 2009, IMF

Writedowns by financial institutions in 2010 is estimated to be equal to the total writedowns in 2009. European and US Bank’s earnings before provisions are projected to drop between a third and half all the way thru mid-2010. Total charges  is expected to peak at 4.2% in the US, 3.4% in the UK 2.8% in the Euro zone. These levels are well above those experienced during the Great Depression in the USA. Banks in Europe and USA would post losses thru 2010 though a modest return to flat returns is possible in 2010.