Tuesday, June 23, 2009

Steeper contraction of growth projected

World Bank downgrades earlier predictions in March, citing uncertainty

THE World Bank warned yesterday that prospects for the global economy remained 'unusually uncertain', despite recent signs of improvement in parts of the world, and cut this year's growth forecasts for most economies.

The agency, which has recently cut its forecast for the global economy to a contraction of 2.9 per cent from a projection of a 1.7 per cent decline set in March, released details on individual economies for the first time yesterday.

Growth is expected to return next year with a 2 per cent expansion, lower than the 2.3 per cent prediction about three months ago.

The bank said it will take time for wealthier nations to fix financial systems shaken by a credit crisis that has led to almost US$1.5 trillion (S$2.2 trillion) in write-downs and losses, and wiped out about US$26 trillion in stock market value worldwide since 2007.

Mr Justin Lin, the bank's chief economist, said in a statement that this hurdle, 'combined with emerging limits to expansionary policies in high income countries', will restrain a global rebound.

Agreeing, Mr Marco Huwiler, a strategist at Clariden Leu in Zurich, which manages about US$88 billion, said: 'We see some positive signals pointing towards a stabilisation, but a V-shaped recovery is not realistic. The growth potential will be lower than before the recession.'

The bank downgraded its forecast for the United States this year, calling for a 3 per cent shrinkage in the world's biggest economy, after predicting a 2.4 per cent contraction in March.

Japan's economy will shrink 6.8 per cent this year, more than the bank's prediction in March of a 5.3 per cent decline, while the Euro area will shrink 4.5 per cent, almost twice as much as the previous 2.7 per cent contraction forecast.

The bank's global outlook is more pessimistic than the forecast by its sister organisation, the International Monetary Fund (IMF). The Fund's forecast for this year calls for a global contraction of 1.3 per cent, with growth returning to 2.4 per cent next year.

But yesterday, the IMF's chief economist, Mr Olivier Blanchard, said the lender was currently in the process of revising its economic forecasts, adding that the pace of recovery was likely to prove relatively weak.

New forecasts could be expected early next month, he said, declining to give details.

'I cannot give a preview of the (new) numbers, but there aren't going to be dramatic differences,' he said on the sidelines of a forum. 'They could be up or down by 1 per cent,' he said.

He added that an increase in exports is needed for a sustained recovery in the US and this may require an adjustment in the value of the US dollar.

'For the US, it is absolutely no question that a sustained recovery has to come from a large increase in exports; that may not be very easy to do. This may require fairly substantial adjustments in the dollar,' he told a conference.

The World Bank yesterday also called on governments around the world for vigilance in drawing up exit strategies to reverse their expansionary monetary and fiscal policies once recovery takes off.

Governments around the world have borrowed billions of dollars to fight the worst economic crisis in decades, providing incentives for businesses and consumers to spend and embarking on big infrastructure programmes to create jobs and stimulate activity. The US is implementing a two-year, US$787 billion stimulus package, while China is spending US$585 billion.

Economics professor Nouriel Roubini from New York University, who predicted the financial crisis, warned yesterday that the global economy may suffer another slump due to the potential 'double whammy' of rising oil prices and widening budget deficits.

'I see the worry of a double whammy' from energy costs and fiscal burdens, increasing the risk of a setback in the economic recovery, Prof Roubini told a conference. Oil may rise to US$100 a barrel, he said.

Oil prices have more than doubled this year to as much as $73.23 a barrel this month.

European Central Bank President Jean-Claude Trichet warned on Sunday that governments now had no room for more debt and would have to start bringing down budget deficits.

'There is a moment where you can't spend any more and you can't accumulate any more debt. I think we are at that moment,' Mr Trichet told Europe 1 radio.


Source: Straits Times, 23 June 2009

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