Gloom and doom, or overkill?
The World Bank’s warning of a possible new global recession much deeper and longer lasting that the 2008-09 slowdown certainly got attention yesterday.
The World Bank cut its world growth forecast for 2012 and 2013, after acknowledging the world is in a precarious position under threat of a Lehman Brothers-like crisis engulfing capital markets.
Some commentators were enthusiastic in retailing the warning, others were a bit sceptical, but did agree that the problems in Europe, especially Greece, were still the single largest threat to global growth.
But it would pay to take this gloomy warning with a small dose of salt and wait and see what happens.
Certainly markets were not all that worried.
Markets in Asia on the whole ignored dire warnings and the reduced growth forecasts and finished higher.
Australia was up around 0.2%, Japan, Hong Kong and South Korea rose. Shanghai eased from Tuesday’s solid gains.
Markets in Europe were mostly higher, and they finished up in the US.
Called Global Economic Prospects, which is the usual six monthly assessment of the world economy, the World Bank report was particularly concerned about the dangers of a new credit crunch, triggered by the heavy borrowing needs of debt-laden developed world countries, not least the weaker members of the eurozone.
"The downturn in Europe and weaker growth in developing countries raises the risk that the two developments reinforce one another, resulting in an even weaker outcome," it said.
It also cited failure so far to resolve high debts and deficits in Japan and the United States and slow growth in other high-income countries, which it said could trigger sudden shocks.
"While contained for the moment, the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains.
"In particular, the willingness of markets to finance the deficits and maturing debt of high-income countries cannot be assured.
"Should more countries find themselves denied such financing, a much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic cannot be ruled out, the 30 page report warned.
It went on, "These are not auspicious circumstances, and despite the significant measures that have been taken, the possibility of a further escalation of the crisis in Europe cannot be ruled out.
"Should this happen, the ensuing global downturn is likely to be deeper and longer-lasting than the recession of 2008/2009."
Regardless of the worst case scenario, the bank has halved its forecast for growth among high-income countries, and predicted a recession for the eurozone (nothing new in that forecast though).
It slashed its global growth forecast for 2012 from 3.6% to 2.5% and then 3.1% in 2013.
The World Bank said it sees High-income (developed) nations growing by just 1.4% this year rather than the 2.7% suggested in last June’s estimates. The euro area’s economy will shrink 0.3% against a rise of 1.9%.
The World Bank said a Lehman-style financial shock could take 4.2 percentage points off the forecast.
That Lehman style shock includes the freezing of financial market access to up to four eurozone countries. The World Bank says that would see growth shrink by more than forecast and if that 4.2 percentage points or more hit to growth happened, a sharp global recession would happen.
(Of that four eurozone countries and besides Greece, would that include three of the following, Portugal, Spain, Italy, Belgium or France?).
"Developing countries need to prepare for the worst,” said the bank. And, no doubt, so do developed countries who are probably more exposed, especially the US and Europe with high debts and weak economic growth, as well as high unemployment.
In June of last year, the World Bank forecast the world economy would grow by 3.6% this year and next. Now its 2.5% (if there’s no Lehman problem) this year and 3.1% in 2013.
Developing country economies will continue to better than the developed economies, but the World Bank has cut its forecasts for growth in developing countries to 5.4% in 2012 (6.2% last June) and 6% next year, down from 6.3 last June.
The eurozone’s recession (with growth of a negative 0.3% is mild and driven by the problems in Greece, Spain, Italy and Portugal and perhaps France). Six months ago the World Bank said the zone growing by 1.9%, so the change is substantial.
The World Bank trimmed the US growth forecast to 2.2% this year (from 2.9% last June) and 2.4% next year (down from 2.7%).
The Bank says the US growth forecast was cut because of the anticipated global slowdown and the continuing political impasse over spending and taxes. (In that it shares a view similar to Standard & Poor’s when it cut America’s AAA rating last August to AA plus).
(The first estimate for US growth in 2011 comes with the release of the initial 4th quarter estimate next week on January 26).
China, the largest emerging market economy, is expected to grow at a rate of 8.4%, down from 9.2% in 2011 and 10.4% in 2010.
Late last year the World Bank said it saw China’s economy growing 9.1% in 2011.
It saw growth this year of 8.4% (8.7% las
