10 December 2008

Dire Forecast for Global Economy and Trade

This article is extracted from the 10 December 2008 edition of “The New York Times”.

The world economy is on the brink of a rare global recession, the World Bank said in a forecast released Tuesday, with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries predicted to plunge 50 percent….

Even more troubling, several economists said, there is no obvious engine to drive a recovery.

American consumers are unlikely to return to their old spending habits, even after the United States climbs out of its current financial crisis. With growth in China slowing sharply, consumers there are not about to pick up the slack from the Americans. The collapse in oil prices — a side effect of the crisis — has knocked the wind out of consumers in oil-exporting countries.

“We know that the financial crisis now is likely to be the worst since the 1930s,” said Justin Lin, the chief economist of the World Bank, summarizing the projections….

The volume of world trade, which grew 9.8 percent in 2006 and an estimated 6.2 percent this year, will contract by 2.1 percent in 2009, the report said. That drop would be deeper than the last major contraction in trade: 1.9 percent in 1975. …

The sudden drop in capital flows poses a particular danger to oil exporters, some of whom have run up heavy debts. …

Reflecting what is by now conventional wisdom, the World Bank recommended that countries undertake large fiscal stimulus programs to cushion the downturn. The bank itself has committed up to $100 billion in aid to developing countries over three years.

If there is a silver lining amid the gloom, it is the relief that lower food and fuel prices mean for poorer countries. While the prices of almost all commodities have fallen sharply since July, they remain higher than in the 1990s, which the bank says should prevent future supply shortages.

As the World Bank’s experts struggled to find a historical analog for the slump, they said it had more in common with the Depression of the 1930s than with the severe recessions of the 1970s or 1980s….