We’re still in recession: World Bank

Hopes that the recession may be drawing to a close were dashed Monday, as the World Bank issued a rather desolate forecast for global economic growth and trade — of output falling by 2.9%; world trade by nearly 10%; and private capital flows likely to plummet from $707 billion in 2008 to an anticipated $363 billion in 2009.

Given the paucity of capital in international markets and the uncertainty surrounding future demand, production and global trade of manufactured goods has also seen a sharp decline — industrial production in developed economies dropped by 15% since August 2008, and that in developing countries, excluding China, by 10%.

According to World Bank’s chief economist and senior vice-president, Justin Lin, extraordinary measures by international governments may have reclaimed global financial systems from the brink, but economic recession in the real sectors still persists.

He suggested bold policy measures, including restoration of domestic lending and global capital flows, to break the cycle, at the annual Bank Conference on Development Economics in Seoul.

Lin emphasized the key role developing countries can play in the global recovery, and drew attention to the grave developmental emergency that poor and vulnerable nations face.

GDP growth in developing countries is expected to slow sharply, from 5.9% in 2008 to 1.2% in 2009. Their performance, however, surpasses rich countries, whose collective GDP is expected to fall a whopping 4.5% in 2009. But when India and China are removed from the mix, developing countries as a group will experience a GDP decline of 1.6%, a real setback for poverty reduction.

Developing countries are also likely to face a dismal external financing climate in 2009, according to the Global Development Finance report (GDF). With private capital flows declining dramatically, many countries will find it difficult to meet their external financing needs, estimated at $1 trillion.

Private debt and equity flows will also likely fall short of meeting the external financing needs of developing countries, with the gap estimated to range between $350 billion and $635 billion. Capital flows from official sources, plus tapping foreign reserves, will help fill the gap in some countries, but in others, there will be sharp and abrupt macroeconomic adjustments.

Mansoor Dailami, lead author of the GDF report, Global Development Finance 2009: Charting a Global Recovery, warns, “Poor countries face increasingly grave economic prospects if the dramatic deterioration in their capital inflows from exports, remittances, and FDI is not reversed in 2010.”

“Eventually, governments will need to relinquish their high stakes in the financial system, making way for the private sector,” Dailami says. “The big expansion of money supply in rich countries will need to be unwound, and fiscal deficits will need to be cut in the medium term. This will help maintain debt sustainability and avoid another debt crisis as seen in the 1970s and 1980s.”

Global GDP growth is expected to rebound to 2% in 2010 and 3.2% by 2011. In developing countries growth is expected to be higher, at 4.4 % in 2010 and 5.7 % in 2011, albeit subdued relative to the robust performance before the current crisis.

To read the World Bank’s annual Global Development Finance (GDF) report, click here.

(06/22/09)