Global growth to contract for first time since World War II

By Arun Kumar, IANS,

Washington : Global growth is expected to contract by 1.7 percent this year, marking the first decline in world output growth since World War II, according to World Bank estimates released Tuesday.

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GDP is projected to decline by 3 percent in OECD countries and by 2 percent in other high-income economies, said the new Global Economic Prospects update released on the eve of the London summit of Group of 20 advanced economies.

GDP growth in the developing world will slow to a projected 2.1 percent in 2009 from 5.8 percent in 2008 with the Bank halving its November 2008 estimate of 4.4 percent growth, reflecting the rapid deterioration of global financial and economic conditions.

The World Bank’s baseline forecast predicts growth momentum to turn weakly positive in 2010 as financial-sector consolidation, lost wealth and knock-on effects from the financial crisis continue to dampen economic activity. However, the pace and timing of the recovery is still highly uncertain.

In the update, the Bank emphasised that even though growth should rebound-albeit slowly-economic activity will remain depressed, with unemployment and significant sectoral adjustment persisting for the next two years.

“Even if global growth turns positive again in 2010, output levels will remain depressed, fiscal pressures will mount, and unemployment levels will rise further in virtually every country well into 2011,” said Hans Timmer, Manager, Global Trends, in the World Bank’s Development Prospects Group.

World trade in goods and services is expected to fall 6.1 percent in 2009, a historic decline. At $47 per barrel in 2009, oil prices are projected to be more than 50 percent below their 2008 levels. Non-oil prices are also expected to remain low, some 30 percent lower than in 2008.

Fiscal balances are projected to deteriorate sharply in developing countries in response to weaker revenues, higher borrowing costs, and larger transfers to maintain social safety nets.

This could be particularly worrisome in developing Europe and Central Asia, where trade and production have severely contracted, the private sector is highly vulnerable, and social safety nets have broad coverage, the update said.

World GDP growth is expected to increase to a modest 2.3 percent in 2010, but if a balance of payments crisis were to emerge within a developing region, it would prove difficult to contain and would hamper global recovery.

Another risk is that the recovery in credit markets may proceed more slowly due to continued financial sector problems, which would prolong the period of capacity adjustment in the real sector and extend the global downturn.