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World Bank offers dire forecast for world economy

WASHINGTON: In a bleaker assessment than those of most private forecasters, the World Bank predicted Sunday that the global economy would shrink in 2009 for the first time since World War II.

The bank did not provide a specific estimate, but bank officials said its economists would be publishing one in the next several weeks.

Until now, even extremely pessimistic forecasters have predicted that the global economy would eke out a tiny expansion but had warned that even a growth rate of 5 percent in China would be a disastrous slowdown, given the enormous pressure there to create jobs for the country’s rural population.

The World Bank also warned that global trade would contract for the first time since 1982, and that the decline would be the biggest since the 1930s.

In a report prepared for a meeting next week of finance ministers from the 20 industrialized and large developing countries, the World Bank said the economic crisis that started with junk mortgages in the United States was causing havoc for poorer countries around the world, not only stifling their growth but also choking off their access to credit as well.

The bank said the financial disruptions were all but certain to overwhelm the ability of institutions like it and the International Monetary Fund to provide a buffer.

The bank, which provides low-cost lending for economic development projects in poorer countries, pleaded for wealthy governments to create a “vulnerability fund” and to set aside a fraction of what they spend on stimulating their own economies for assisting other countries.

“This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis,” said Robert Zoellick, the World Bank president. “We need investments in safety nets, infrastructure, and small and medium-size companies to create jobs and to avoid social and political unrest.”

The bank said developing countries, many of which had been growing rapidly in recent years, were now being devastated by plunging exports, falling commodity prices, declining foreign investment and vanishing credit.

The effect of the global slowdown varies widely among countries, and the drop in prices for oil and other commodities has created winners and losers, But as a whole, the bank said, emerging-market countries faced a combined financing gap in 2009 of at least $270 billion and as much as $700 billion.

The report detailed the variety of ways in which the global slowdown had hammered poorer countries in Latin America, Central Europe, Asia and Africa.

Central European countries like Poland, Hungary and the Czech Republic are hurting from diminished exports to Western Europe as well as a severe credit crunch among major European banks, which have suffered huge losses on U.S. mortgages and mortgage-backed securities.

East Asian countries are reeling from plunging global trade. Demand for inexpensive manufactured goods has plunged in the United States. That slump has hit many Asian countries directly and indirectly, through falling demand by China for raw materials and component products.

Lower commodity prices have caused great problems in many African and Latin American countries. The steep slide in oil prices – 69 percent between July and December of 2008 – has spurred growth in poorer oil-importing countries but has caused immense difficulty in poorer oil-exporting countries.

Brazil, an exporter of oil as well as many other commodities and manufactured goods, reported its first trade deficit in eight years as exports dropped 28 percent in 2008.

Zoellick called for rich countries to set aside 0.7 percent of the amount of money they spend to stimulate their own economies for a “vulnerability fund” to help stabilize poorer countries.

Zoellick said the new fund could then make the money available to countries through the World Bank, the United Nations or other global financial institutions like the International Monetary Fund.

He said the World Bank had the potential to triple its own lending in 2009 to $35 billion, though that would still be a small fraction of even the most optimistic estimate on the shortfall facing poor countries.

Edmund L. Andrews

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