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World Bank: Global Economic Update

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South Asia (SAR) has been marked down to 3.7 percent growth for 2009 from 5.4 percent anticipated earlier—and down from 5.6 percent registered in 2008. Though terms of trade have moved in favor of the region with the falloff in oil prices, weakening demand in export markets (including burgeoning Indo-Sino trade) is being felt sharply, as is a tempering of services exports from India’s high-tech centers, as capital spending wanes globally. Remittances are anticipated to ease as conditions in host countries falter, albeit with some lag. Capital inflows have diminished, contributing to falloff in investment growth, notably in India. Fiscal support for slowing economies may face constraints in already quite high budget deficits.

External financing requirements for developing countries as a group are anticipated to increase to $1.3 trillion in 2009, comprised of current account deficits ($330 billion) and principal repayments on private debt coming due ($970 billion). With a decline in capital flows to developing countries underway, this would generate an estimated financing gap of between $270-$700 billion, depending on the size of roll-over risks and the magnitude of capital flight. Regions with the largest funding gaps are Europe and Central Asia, Latin America, and Sub-Saharan Africa. In the current projections, 84 of 109 developing countries would face financing gaps, in most cases too large to cover by drawing down reserves alone. This suggests that in the absence of sufficient international support, countries could be forced into generating a sharp reversal in current account balance, implying further decline in domestic demand and imports.

Debates regarding the possible “shape” of recovery from the current downturn continue. But there is little question that the outlook for 2010 in particular, is surrounded by extreme uncertainty across a wide array of policy- and other variables that will eventually bring about a revival in economic activity. The pronounced cycle in worldwide investment could have sufficient dynamic to carry global growth back to positive territory by 2010, as the pace of decline in investment moderates, and postponed demand for durable consumer goods begins to catch up. Together with the effects of monetary and fiscal stimulus this results in the modest global recovery in the baseline forecast presented here.

However, continued banking problems or even new waves of tension in financial markets could lead to stagnation in global GDP or even to another year of decline in 2010. In all cases, the estimated output gap1 would increase in 2010 because (in the baseline as well), growth falls well short of potential (figure 1.e). This implies that unemployment and fiscal deficits will increase further into 2010, in high-income and developing countries alike, while disinflationary conditions could persist well into the year.

World Economic Prospects 2009

Scary Quote of the Day

"We now expect the global economy to come to a virtual halt," said IMF Chief Economist Olivier Blanchard

Global Economic Prospects 2009

Global Economic Prospects 2009:Commodity Markets at the Crossroads;

Global Economic Prospects 2009, released today, finds the global economy transitioning from a long period of strong developing-country led growth to one of great uncertainty as the financial crisis in developed countries has shaken markets worldwide. GEP 2009 projects that world GDP growth will be 2.5 percent in 2008 and 0.9 percent for 2009. Developing countries will likely grow by 4.5 percent next year, down from 7.9 percent in 2007, while growth in high-income countries will turn negative.

“People in the developing world have had to deal with two major external shocks-- the upward spiral in food and fuel prices followed by the financial crisis, which has eased tensions in commodity markets but is testing banking systems and threatening job losses around the world,” said Justin Lin, World Bank Chief Economist and Senior Vice President, Development Economics. “Urgent steps are needed to help reduce fallout from the crisis on the real economy and on the poorest, including through projects that build better roads, railways, schools, and health care systems.”

In light of the crisis, the World Bank Group is increasing its support for developing countries, including through new IBRD commitments of up to $100 billion over the next three years as well as via its private sector arm, the IFC, in the form of facilities for trade finance, banking recapitalization, and for privately-funded infrastructure projects facing financial distress.

With world trade volumes projected to contract 2.1 percent in 2009, developing countries will see a big drop in their exports. Tighter credit conditions and increased uncertainty are expected to see investment growth in both developing and high-income countries slow in 2009—actually falling 1.3 percent in developed countries and rising by only 3.5 percent in developing countries versus 13 percent in 2007.

“Policymakers in developing countries should monitor their banking sectors carefully and be prepared to enlist external support to shore up currencies and banking systems.” said Uri Dadush, Director of the World Bank’s Development Prospects Group, “Given the expected decline in global trade, both developed and developing countries need to resist the temptation to resort to protectionism, which would only prolong and deepen the crisis.”

Key Findings-Summary

Trade is declining

'We may have the first decline in trade since 1982 next year, and in many parts of the world, remittances are also drying up,” warned last month World Bank President Robert Zoellick just ahead of the G20 Summit in Washington D.C. “The most vulnerable in society, as always, are the ones at most risk.”

World trade has been an engine of the world economy, with developing countries posting nearly 8 percent growth and attracting a record $1 trillion in net private capital flows in 2007. But in 2009, world trade could decline for the first time since the eighties. The global economy is forecast to grow by only 1 percent, with developing country growth expected to fall to 4.5 percent from a previously projected 6.5 percent. The World Bank estimates each 1 percent drop in growth could trap another 20 million people in poverty.

“World trade, an engine of the world economy, is now dropping due to falling global demand and lack of trade credit,” said Danny Leipziger, World Bank’s Vice President for Poverty Reduction and Economic Management. “If you can’t get financing to ship your goods, exports will slow down and worsen the economic climate.”

-Trade Is Key to Overcome Economic Crisis

UN's World Economic Situation and Prospects 2009

Advance release of the first chapter, Global Outlook 2009

WEO Update

• Activity in the advanced economies is now expected to contract by ¼ percent on an annual basis in 2009, down ¾ percentage points from the October 2008 WEO projections

• The U.S. economy will suffer, as households respond to depreciating real and financial assets and tightening financial conditions.

• Growth in the euro area will be hard hit by tightening financial conditions and falling confidence.

• In Japan, the support to growth from net exports is expected to decline.

• Financial conditions continue to present serious downside risks

• There is a clear need for additional macroeconomic policy stimulus relative to what has been announced thus far, to support growth and provide a context to restore health to financial sectors. Room to ease monetary policy should be exploited, especially now that inflation concerns have moderated. However, monetary policy may not be enough because monetary easing may be less effective in the face of difficult financial conditions and deleveraging. Also, is some cases room for further easing is limited as policy rates are already close to the zero bound. These are conditions where broad-based fiscal stimulus is likely to be warranted. Fiscal stimulus can be effective if it is well targeted, supported by accommodative monetary policy, and implemented in countries that have fiscal space.

World Economic Outlook

IMF's WEO is released.

World Economic Outlook

According to Michael Mussa;

Economic growth has recently slowed across much of the world economy following stronger-than-expected performance during the first quarter of 2008. The net result is likely to be that on a year-over year basis, global real GDP growth for 2008 will be only slightly below the 3.8 percent forecast last April. For 2009, however, growth now looks likely to decelerate to slightly below 3.5 percent rather than accelerate to 4 percent.

Meanwhile, the broad upsurge in commodity prices of earlier this year has been largely if not completely reversed. In particular, the price for light sweet crude has fallen back from a peak of almost $150 per barrel to about $100 per barrel but is still above the $80 per barrel price of late 2007. Recent sharp declines in commodity prices will help to bring down headline inflation rates, at least for a while, although core inflation rates will likely remain uncomfortably high in a number of countries. In some emerging-market countries, where policies have remained lax, inflation will continue to be a critical problem.

Thus, looking to the rest of 2008 and to 2009, the world economy will experience mild stagflation. World real GDP growth (on the basis of the International Monetary Fund’s World Economic Outlook [WEO]) will be significantly below the 4¾ percent average annual rate achieved from 2004 through 2007 but meaningfully above the 2½ percent rate that marks the borderline of global recession.1 World consumer price inflation (measured on a 12-month basis) will fall below the recent high of over 6 percent but remain above 4 percent through 2009. Economic policies, therefore, will generally face the dual challenges of ensuring that inflation returns to acceptable rates within reasonable time horizons and of guarding against unnecessarily deep and prolonged slowdowns in output growth.

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