Forecasts: World Bank’s Gloomy Outlook

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% last June), which is unchanged in the latest forecast, which has to be a bullish point given the downgrades made in Europe and the US.

That's relatively good news for Australia, but it offset by forecasts of slower growth in two other big Australian export markets, Japan and India.

Japan's economy will grow 1.9% this year, down sharply from the 2.6% rate forecast June.

India, one of Australia's fastest growing markets, will grow by 6.5% in 2012, sharply slower than the 8.4% rate from the bank six months ago.

The World Bank said that while it doesn't expect China to implement any stimulus, like it did in 2008-09 with its rapid infrastructure spending, an increase in Chinese consumption would boost other commodity exporters like Brazil, South Africa, Australia and Argentina.

Looking at East Asia and the Pacific, the World Bank said that the region has recovered quickly from the March 2011 Tohoku disaster in Japan, but "flooding in Thailand and the turmoil in Europe, have started to affect regional growth."

"After expanding by 9.7 percent in 2010, regional GDP grew an estimated 8.2 percent in 2011, but growth is projected to ease to 7.8 percent for both 2012 and 2013.

While saying it doesn't expect the worst case ("Lehman-like"), the bank said "we are examining the possibility that things could go worse", according to Andrew Burns, manager of Global Macroeconomic Trends, development prospects group of the World Bank.

He said the dire tone to the biannual Global Economics Prospects 2012 report is to assist developing countries in preparing for such possibilities.

Mr Burns says that the World Bank is concerned that both developed and developing countries have diminished ability to withstand a global crisis this time around.

High-income nations don't have the fiscal resources to stabilise markets or support financial institutions in distress (as we are seeing in Europe), while emerging economies are already were in the midst of a slowdown induced by raising policy rates aimed at cooling inflation, and the European crisis is adding to this weakness.

The slowdown in global growth is expected to weaken commodity prices. Oil is expected to drop 5.5% to $US98.20 a barrel, while non-oil commodities are expected to ease by 8.9% in the base-case scenario.

So what will the International Monetary Fund have in its world economic outlook updated to be released next week?

The World Bank forecast is lower than ones from the IMF and the Organisation for Economic Co-operation and Development, who last officially updated their numbers in September and November, respectively.

The IMF, which has said it expects to cut its forecasts had predicted world growth of 4.0% for this year, while the OECD had a forecast of 3.4% on the table.