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World faces bleak new year

World faces bleak new year
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First Published: Thu, Dec 11 2008. 12 20 AM IST

Updated: Thu, Dec 11 2008. 12 20 AM IST
Another month, another new downgrade in the outlook for growth.
Only last month, the International Monetary Fund (IMF) had predicted that world gross domestic product (GDP) growth would slow to 2.2% in 2009. Now, the World Bank has brought out its Global Economic Prospects 2009 report that forecasts global GDP growth at 0.9%, the “weakest since records became available beginning in 1970”.
At the time of the last IMF forecast, this column had pointed out that a global growth rate of 2.2% was too high for such a crisis, because that was the growth rate during the last downturn in 2001. The assumption IMF made was that the recession in the advanced economies would be offset by comparatively robust growth in countries such as India and China. It had forecast a decline in GDP of -0.3% for the advanced economies and -0.7% for the US in 2009.
The World Bank seems to be less pessimistic, predicting a fall of just -0.1% for the high-income countries and -0.5% for the US in 2009.
But IMF had assumed 5.1% growth for emerging and developing economies, while the World Bank expects it to be 4.5% for 2009.
While IMF predicted growth of 8.5% for China and 6.3% for India next year, the World Bank puts growth for these countries at 7.5% and 5.8%, respectively.
In other words, the difference between IMF and World Bank is not merely one of growth numbers, but also of outlook, with the World Bank being more pessimistic about the ability of developing countries to maintain high rates of growth during a global meltdown.
That is not surprising, considering what the World Bank has to say on world trade:
“International trade is projected to decelerate sharply, with global export volumes falling by 2.1% in 2009—the first time they have declined since 1982 and eclipsing the 1.9% fall-off that occurred in 1975. Export opportunities for developing countries will fade rapidly because of the recession in high-income countries and because export credits are drying up and export insurance has become more expensive”.
The World Bank also says that the outlook is very uncertain and global GDP growth could fall to 0.4% in 2009 or be as strong as 1.4% (the level during the 1991 recession). Therefore, it warns “policymakers in both developing and high-income countries must be prepared to weather a worst-case scenario of even lower growth, including the possibility of a decline in world GDP for the first time in the post-war period, as well as a financial meltdown that could lead to a sudden stop of credit flows to all but the most creditworthy borrowers”.
On financial markets, the World Bank says that even if credit markets thaw and confidence returns, overall access to credit would continue to be constrained for developing countries.
It believes that, “As a consequence, net private debt and equity flows to developing countries are anticipated to decline from the record high $1.03 trillion (7.6% of developing-country GDP) set in 2007 to about $530 billion (3% of GDP) in 2009”.
It also says that although foreign direct investments (FDI) have held up well during previous downturns, this time the credit crunch would mean less money for FDI. That would mean less funding for projects, the continuation of tight liquidity for companies and low asset prices next year.
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First Published: Thu, Dec 11 2008. 12 20 AM IST