- The Washington Times - Tuesday, June 23, 2009

The global economy will shrink by 2.9 percent this year, the World Bank predicted Monday. It would be the first global contraction in the post-World War II period, the bank warned in its annual Global Development Finance report.

World trade will plummet by nearly 10 percent this year, the sharpest drop in postwar history, the bank said.

The worldwide recession will exact a much bigger toll in lost output than the bank expected as recently as March, when it projected the world economy would contract by 1.7 percent this year.

The U.S. economy is expected to decline by 3 percent in 2009, a steeper setback than the 2.4 percent contraction the bank forecast in March.

White House spokesman Robert Gibbs said Monday that President Obama expects the U.S. unemployment rate, 9.4 percent in May, will reach 10 percent within the next few months. Meanwhile, U.S. interest rates have been rising lately as the 10-year Treasury note, which plunged to nearly 2 percent in December, briefly touched 4 percent last week and settled at 3.7 percent on Monday.

The broad-based Standard & Poor’s 500 Index, which lost 2.6 percent last week, shed another 3.1 percent on Monday. Analysts attributed part of Monday’s stock market retreat to the World Bank’s more pessimistic report for 2009.

The eventual recovery, which most economists expect to begin later this year, will be modest, according to the World Bank’s forecast. The global economy is expected to expand by just 2 percent next year and 3.2 percent in 2011, the bank said. In contrast, during the 2004-2007 period, the world economy roared ahead at an annual rate of about 5 percent.

U.S. growth next year will be a sluggish 1.8 percent, the bank said.

After expanding by 8.1 percent in 2007 and 5.9 percent in 2008, developing countries are expected to grow by just 1.2 percent this year and a relatively sluggish 4.4 percent next year. When China and India are excluded, the gross domestic product of the remaining developing countries is expected to fall by 1.6 percent this year, “a real setback for poverty reduction,” the report said.

Developing countries, which rely on the World Bank and its sister organization, the International Monetary Fund, for emergency financing during economic crises, have been hit hard because net private capital inflows plunged from $1.2 trillion in 2007 to $700 billion last year. The World Bank expects international capital flows to developing nations to tank again this year, falling by nearly 50 percent to $363 billion, which is just 30 percent of the 2007 level.

“Already under severe strain, low-income countries face increasingly grave economic prospects if the dramatic deterioration in their capital inflows from exports, remittances and foreign direct investment is not reversed in 2010,” the World Bank warned in its report.

The World Bank is much more pessimistic this year than the IMF, whose April forecast projected a 1.3 percent decline in global GDP in 2009. However, both institutions expect a very modest global expansion of about 2 percent next year.

Private forecasters are also predicting a tepid recovery.

“The global upturn that we are expecting will probably be sluggish, at least initially,” said Jay H. Bryson, global economist for Wachovia Economics Group. “The eventual U.S. recovery probably will be held back by slow growth in consumer spending, as individuals attempt to de-lever and repair their battered balance sheets.”

Wachovia expects the U.S. economy to shrink by 2.7 percent this year and grow by 2.1 percent next year.

Rising unemployment and falling home values will continue to generate head winds against consumption next year in the United States, where, the World Bank observed, household assets plunged by a staggering $11.3 trillion during 2008.

“The need to restructure the banking system, combined with emerging limits to expansionary policies in high-income countries, will prevent a global rebound from gaining traction,” said Justin Lin, World Bank chief economist.

To improve the prospects that the global recovery will gain traction, the bank recommends fiscal policy coordination to stimulate total global demand. “[A]ny country that acts alone — even the United States — may reasonably fear that increases in government debt will cause investors to lose confidence in its fiscal sustainability and so withdraw financing,” the World Bank warned.

The Congressional Budget Office reported last week that President Obama’s 2010-2019 budget blueprint would generate cumulative budget deficits exceeding $9 trillion and increase the level of publicly held federal debt from 41 percent of GDP in 2008 to 82 percent in 2010.

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