A Decade of Learning

The world could go through its worst recession since the Great Depression as a massive financial crisis has slashed global investment and sharp drops in commodity prices severely hurt poor-country exports, the World Bank warned last month.

The global development bank slashed its previous estimates for global growth to 2.5 percent in 2008 and 0.9 percent in 2009, well below the three-percent rate typically considered the dividing line between global growth and contraction. “The financial crisis is now likely to result in the most serious recession since the 1930s,” said the World Bank’s chief economist Justin Lin, as the group released its annual report on the global economy.

According to the International Monetary Fund, global growth of anything less than 3pc constitutes a world recession. The warning was echoed by Richard Berner of Morgan Stanley, who said: “A global recession is now under way and risks are still pointed to the downside for commodity prices and earnings.”

The recession in the industrialised world will be longer and deeper than forecast so far and could spread to emerging economies such as China and India, the OECD and European commission warned. Klaus Schmidt-Hebbel, OECD chief economist and Marco Buti, European commission director-general of economic affairs, both indicated that the projected recovery could be postponed until later in 2010.

Buti said the next commission forecasts for the EU and eurozone economies, to be published a month earlier than planned in January, would be significantly worse than those drawn up a few weeks ago.

Schmidt-Hebbel told a European Policy Centre conference the OECD would now change its forecast of just two weeks ago and extend the projected recession by at least a quarter, with unemployment peaking in 2010-11. The OECD is so far forecasting a rise of 8 million unemployed to 42 million in its area.  

Their gloomy readings of global economic forecasts came as a leading German forecaster, the RWI institute, said Europe’s biggest economy would contract by 2% in 2009 – the worst recession since 1949. France’s industrial output collapsed by a record 7.2% last month.

The current economic slowdown was notable for both its length and breadth across all regions of the world, leading to a contraction in the most wealthy nations and a sharp slowdown in emerging countries, the bank said. The bank’s analysis pointed to a number of indicators of a dramatic slowdown. Global trade volumes will contract for the first time since 1982. Worldwide investment will fall 50 percent in 2009, compared to 2007.  

The financial crisis has cut access to loans in advanced and developing countries, pulling investment out of poorer nations and reducing consumer spending. A record surge in energy, food and metal prices in the first half of 2008 plunged between 130 and 155 million new people into poverty as families struggle to pay for food, the bank said.

But the sharp drop in commodity prices since the summer has hurt poorer nations’ exports and added to the global recession. The World Bank still expected commodity prices to remain far higher in the future than in the last decade as emerging countries continue to use up more resources.

Oil prices will average $75 per barrel in 2009, the bank said. Crude oil is currently below $40 but stood above $140 per barrel in July. The forecasts are dramatically lower than the 2.2-percent growth in 2009 predicted by the bank’s sister organization, the International Monetary Fund.

Lin urged all countries with the ability to increase government spending to use it to boost domestic demand. But he warned that wealthy nations must invest in projects that will spur long-term growth, such as by investing in clean energy or infrastructure.

Schmidt-Hebbel, who has forecast a gradual recovery in the 30-strong OECD from the third quarter of next year and a return to potential growth in the final quarter of 2010, said one silver lining was the decline in food and energy prices.

Another was the likelihood that central banks, led by the US Federal Reserve which is expected to cut rates to 0.5%, would further ease monetary policy. But the impact of cuts to near-zero could take longer than usual to feed through. As China reported the first drop in its exports for seven years, he also indicated a “small” likelihood that both it and India could experience negative growth as global trade slows down. But he added: “This will not be a great depression.”

BY RITU PANDEY