World Bank warns of 'double dip' as stimulus wanes
Posted by BusinessIntelligence Middle East
Source: BI-ME , Author: BI-ME staff
Posted: Thu January 21, 2010 12:23 pm

INTERNATIONAL. World growth may wilt later this year as government stimulus packages fade, The World Bank warned Wednesday in its latest report.

According to the Global Economic Prospects 2010, the global economy will grow 2.7% this year and 3.2% in 2011. It contracted 2.2% in 2009.

"A great deal of uncertainty clouds the outlook for the second half of 2010 and beyond," the report said.

Though the "acute phase" of the crisis had passed, chronic weaknesses remained, it said. Much depended on the timing of withdrawal from massive stimulus programmes and adjustments to monetary policy, it added.

Mishandling could result in a "double-dip", with a return to recession in 2011, it warned.

In the US, growth is projected at 2.5% in 2010 and 2.7% in 2011. European economies will see a slower recovery, with growth forecast at only 1% in 2010.

China's economy, whose recovery has led the global rebound, will expand by 9% this year and the next, the report said. China has reported that its economy surged 10.7% in the fourth quarter of last year, with annual growth for 2009 at 8.7%.

Developing countries will as usual see higher growth rates, at a combined 5.2% this year, but will be plagued by shortages of financing and investment that will handicap their progress.

Rich countries will grow more slowly, by 1.8% in 2010, as fragile financial markets and anaemic private demand crimp job creation and investment, the report says.

World trade volumes, which fell by a staggering 14.4% in 2009, are predicted to expand by 4.3% and 6.2% this year and in 2011, said the World Bank.

FRAGILE GROWTH

The report warned that while the worst part of the financial crisis might be over, the global recovery was still fragile.

"The global economic recovery that is now underway will slow down later this year as the impact of fiscal stimulus wanes. Financial markets remain troubled and private sector demand lags amid high unemployment," said the report.

"Overall, these are challenging times," said Justin Lin, chief economist and senior vice president of the World Bank.

"The depth of the recession means that even though growth has returned, countries and individuals will continue to feel the pain of the crisis for years to come," he said.

The World Bank predicted that the fallout from the crisis would change the landscape for finance and growth over the next 10 years.

Hans Timmer, an author of the report, said data indicated that unemployment would only get worse.

"Actually growth this year is not even strong enough to generate the jobs for the new people that are coming on the global job markets, let alone that you need to create employment for people who have lost their jobs in 2009," Timmer said at a news briefing.

UNCERTAINTY CONTINUES

The World Bank said that considerable uncertainty continued to cloud the global economic outlook. Depending on consumer and business confidence in the next few quarters and the timing of fiscal and monetary stimulus withdrawal, growth in 2011 could be as low as 2.5% and as high as 3.4%.

The report warned that, despite the return to growth, it would take several years before economies recoup the losses already endured. It estimated that about 64 million more people would be living in extreme poverty (on less than US$1.25 a day) in 2010 than would have been the case had the crisis not occurred.

Further, in the next five to 10 years, increased risk aversion, a more prudent regulatory stance, and the need to curb some of the riskier lending practices during the boom period that preceded the crisis can be expected to result in scarcer, more expensive capital for developing countries.

"As international financial conditions tighten, firms in developing countries will face higher borrowing costs, lower levels of credit, and reduced international capital flows. As a result, over the next five to seven years, trend growth rates in developing countries may be 0.2%-0.7% lower than they would have been had finance remained as abundant and inexpensive as in the boom period," said Andrew Burns, another author of the report.

"Policy can help mitigate the worst symptoms of this crisis," said Justin Lin. "However, there are no silver bullets and achieving higher growth rates will require concerted efforts to increase domestic productivity and lower the domestic cost of finance."

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