World Bank Says Global Economic Recession to Deepen

By Timothy R. Homan

June 22 (Bloomberg) -- The World Bank said the global recession this year will be deeper than it predicted in March and warned that a flight of capital from developing nations will swell the ranks of the poor and the unemployed.

The world economy will contract 2.9 percent, compared with a previous forecast of a 1.7 percent decline, the Washington- based lender said in a report today. Growth will be 2 percent next year, down from a 2.3 percent prediction, the bank said.

The bank, formed after World War II to fund health and development projects in poor countries, said that while a global recovery may begin this year, impoverished economies will lag behind rich nations in benefiting. The lender called for “bold” actions to hasten a rebound and said the prospects for securing aid for the poorest countries were “bleak.”

“The recovery is not going to be V-shaped,” said Alvin Liew, an economist at Standard Chartered Bank in Singapore. “We may see slower consumer demand over a prolonged period.”

The bank is more pessimistic than its sister organization, the International Monetary Fund. The IMF, which is forecasting a global contraction of only 1.3 percent this year and growth of 2.4 percent in 2010, said June 19 that it plans to revise estimates “modestly upward.”

The lender’s view also contrasts with that of billionaire hedge fund manager George Soros, who on June 20 told Polish television that the worst of the global financial crisis “is behind us.”

Bigger U.S. Contraction

U.S. stocks fell, extending losses from the first weekly decline for global equities in more than a month. The Standard & Poor’s 500 Index dropped 1.8 percent to 905.07 at 10:08 a.m. in New York after sinking 2.6 percent last week.

Crude oil fell for a second day and the price of copper fell to a three-week low.

The World Bank cut its forecast for the U.S. this year, calling for a 3 percent drop in the world’s biggest economy, after predicting a 2.4 percent contraction in March.

Japan’s gross domestic product will shrink 6.8 percent, more than the previous prediction of a 5.3 percent decline, the lender said. The euro area’s economy may shrink 4.5 percent, compared with the previous estimate of a 2.7 percent contraction.

Global trade may drop by 9.7 percent, compared with a March forecast of a 6.1 percent decline.

Unemployment

“Unemployment is on the rise, and poverty is set to increase in developing economies, bringing with it a substantial deterioration in conditions for the world’s poor,” the World Bank said. While the world is set to return to growth in the second half of 2009, a recovery will be subdued, the report said.

Reduced capital inflows from exports, remittances and foreign direct investment means “increasingly grave economic prospects” for developing nations, the lender said. After peaking at $1.2 trillion in 2007, inflows this year may fall to $363 billion, it said.

Reduced aid from advanced economies because of the economic crisis will also likely weigh on their finances, the bank said.

Economic growth in the developing world will be 1.2 percent, the World Bank said, scaling its outlook back from 2.1 percent. Developing nations in eastern Europe and Central Asia will be some of the hardest hit, the revised forecasts show. The region’s economy is likely to shrink 4.7 percent this year, down from the 2 percent decline projected in March.

China

China, which is the biggest of the developing economies, will keep pumping money into its financial system during this “critical” phase of its recovery, Premier Wen Jiabao said in a statement on the government’s Web site yesterday.

Efforts to revive domestic economies through stimulus spending should be coordinated internationally, the bank said.

“Any 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 report said.

The U.S. is implementing a two-year, $787 billion stimulus package, while China is spending $585 billion.

Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, said in a Bloomberg Television interview today that the group’s updated forecast for the world economy, scheduled for release this week, “is not going to be worse than the last one.”

The OECD in March said the economy of its 30 members will contract 4.3 percent this year.

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