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The outlook for Japan was also changed to a contraction of 6.8 per cent from minus 5.3 per cent.

This announcement came as bad news for stock markets around the world, with US share prices dropping sharply at the start of this week.

The S&P 500 lost 3.1 per cent in one day, the biggest drop since April 20.

According to a report from an international bank, the story about Japan does not come as a surprise because an earlier survey of Japanese economists already showed a downward revision over the past three months in their average outlook for the country's real-GDP growth this year.

Converting these growth forecasts to an absolute basis and then comparing this with corresponding figures of a year earlier shows them forecasting a 6.2-per-cent contraction as of the latest survey versus minus 5.8 per cent as of March.

The downward revision, however, reflects the fact that GDP in the first quarter was much weaker than expected, but the real surprise should have come with the World Bank's forecast in March, as it said this was the first contraction in global economy in the post-World War II era.

According to this report, the S&P 500 rose 1.3 per cent on March 31, the day the forecast was announced, and then 1.7 per cent on April 1.

Note that the S&P 500 lost 3.1 per cent in a single day this week.

Meanwhile, the actual economic environment now suggests that a V-shaped recovery is unlikely, while a multi-year period of sub-trend growth is likely.

Against this backdrop, regional central banks can simply not afford a premature tightening of the monetary policy, according to another international bank's report.

Although policy easing is in its concluding stages in most non-Japan Asian economies, a return to monetary tightening is highly unlikely.

In May, exports had fallen by more than 25 per cent year on year in China, while South Korean and Taiwan exports fell by more than 25 per cent.

Singapore, however, faced a more moderate decline of 12.1 per cent year on year due to the non-business cycle related to the pharmaceutical sector.

The medium-term outlook for non-Japan Asian exports is dependent on an early rebound in US demand and the ongoing rebuilding of household-sector savings.

Based on recent data, export growth in the first quarter of this year was 3.2 per cent in non-Japan Asia and minus 3.6 per cent when China and India are excluded.

This means a sizeable output gap, while the GDP data also exposed negative feedback from exports to domestic demand, particularly in non-Japan Asia excluding China and India.

Domestic demand and investment activities have been substantially scaled down on the back of greater income uncertainty in the trade sector and the poor outlook for exports.

However, some improvement in overall growth is likely as fiscal spending gains traction, the contribution to net exports improves and financing constraints unlock further.

Still, none of these drivers are sufficient to shape out a V-shaped recovery.

On the other hand, the export weakness will lead to years of sub-potential growth and possibly a long-term loss in output.

Exports to G-7 countries and China have been forecast to slow by 20 per cent in the coming years, while the trend growth in these Asian economies, excluding China and India, will fall by 1 to 1.5 per cent.

The pattern of the 1997-1998 recovery, which provides some insight into the future growth path, is likely to be an exaggeration given the absence of a solid tailwind from exports.

Hence the impact of exports on Asian economic growth is much more significant than thought previously, and the fiscal programmes announced so far are intended to be temporary and likely to be insufficient to structurally alleviate domestic demand.

In the end, much more policy action will be needed.