Wednesday, December 10, 2008

World Bank Report

. Wednesday, December 10, 2008

The World Bank issued a forecast Tuesday. At first glance, the report is pretty pessimistic:

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.

The projections are among the most dire in a litany of recent gloomy forecasts for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty.

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.

The bank forecasts the global economy will eke out growth of 0.9 percent in 2009, down from 2.5 percent this year and 4 percent in 2006. That is the slowest pace since 1982, when global growth was 0.3 percent. Developing countries will grow an average of 4.5 percent next year — a pace that economists said constituted a recession, given the need of these countries to grow rapidly to generate enough jobs for their swelling populations.


Drezner thinks this report is actually an optimistic assessment, and I tend to agree. He gives 6 reasons but in my mind it can be summed up in one: the causes of the crisis are not only not resolved, they seem to be getting worse: credit is still frozen, and current account imbalances all over the world seem to be expanding rather than tightening. "Who adjusts?" is still the relevant question, and so far the answer from every country is "You first". There's a little bit of chicken going on, and the longer that game lasts, the more damage can be done.

Elsewhere, Krugman says (and Cowen agrees):

A scenario I fear is that we'll see, for the whole world, an equivalent of Japan's lost decade, the 1990s -- that we'll see a world of zero interest rates, deflation, no sign of recovery, and it will just go on for a very extended period," he told a news conference.

And that's unfortunately very easy to see happen.

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