Washington, Dec 10: World Bank said in a forcast released on Tuesday, Dec 9 that the world economy is on the brink of a rare global recession, with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries predicted to plunge 50 percent.
The projections are among the most dire in a litany of recent gloomy forecasts for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty, the New York Times reports. Even more troubling, several economists said, there is no obvious engine to drive a recovery.
American consumers are unlikely to return to their old spending habits, even after the United States climbs out of its current financial crisis. With growth in China slowing sharply, consumers there are not about to pick up the slack from the Americans. The collapse in oil prices - a side effect of the crisis - has knocked the wind out of consumers in oil-exporting countries.
"We know that the financial crisis now is likely to be the worst since the 1930s," the paper quoted Justin Lin, the chief economist of the World Bank, as saying while summarizing the projections.
The bank forecasts the global economy will eke out growth of 0.9 percent in 2009, down from 2.5 percent this year and 4 percent in 2006. That is the slowest pace since 1982, when global growth was 0.3 percent. Developing countries will grow an average of 4.5 percent next year - a pace that economists said constituted a recession, given the need of these countries to grow rapidly to generate enough jobs for their swelling populations.
"You don't need negative growth in developing countries to have a situation that feels like recession," Hans Timmer, who directs the bank's international economic analyses and projections, was quoted, as saying.
He predicted rising joblessness and closed factories in many developing countries.
The volume of world trade, which grew 9.8 percent in 2006 and an estimated 6.2 percent this year, will contract by 2.1 percent in 2009, the report said. That drop would be deeper than the last major contraction in trade: 1.9 percent in 1975.
Net private flows of capital to developing countries are projected to decline to 530 billion dollars in 2009, from a trillion dollars in 2007.
The loss of that capital will sharply constrict investment in emerging-market economies, the report said, with annual investment growth slowing to 3.4 percent in 2009 from 13 percent in 2007.
Several countries are also being hurt by the decline in the prices of oil and other commodities - a phenomenon the World Bank characterizes as the end of a five-year commodities boom - though the decline in food and fuel costs has relieved the pressure on people in other countries.
The sudden drop in capital flows poses a particular danger to oil exporters, some of whom have run up heavy debts.
"They'll have to roll over that debt, one way or the other," said Simon Johnson, a former chief economist of the International Monetary Fund. "That's going to put a huge squeeze on these countries."
Reflecting what is by now conventional wisdom, the World Bank recommended that countries undertake large fiscal stimulus programs to cushion the downturn. The bank itself has committed up to 100 billion dollars in aid to developing countries over three years.
If there is a silver lining amid the gloom, it is the relief that lower food and fuel prices mean for poorer countries.