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Gloomier by the day

The World Bank, like the global institutions, has been lowering its forecasts for global economic growth in quick succession, as the economic crisis keeps worsening. In November this year, the Bank and the IMF had forecast a contraction in the output of developed countries during 2009. Developing countries including India and China were expected to post positive growth rates but well below what they have been used to. Since then, data from many countries seem to go beyond the global institutions’ assessment and point to an even gloomier future. The latest report from the World Bank paints a particularly dismal picture of the global economy, which is already on the brink of a rare recession and will grow by just 0.9 per cent next year, compared to an estimated 2.5 per cent this year. If the World Bank’s projections are proved right, it would be the slowest rate of growth since 1982 when it registered a mere 0.3 per cent. The Bank has warned that the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty. Developing countries are expected to grow by 4.5 per cent, a rate that is hardly comforting and will delay their efforts to address poverty and reach the millennium development goals.

A number of related forecasts reinforce the gloomy prognosis. World trade is projected to decline for the first time since 1982 while capital flows to developing countries will fall by 50 per cent. More disturbing is the fact that there are no obvious engines of recovery. Even after the financial crisis abates, American consumers might be wary of spending on a scale that they were used to. Consumers in China which is facing a sharp slowdown cannot make up for the slack in the United States. The collapse of oil prices as a direct consequence of the economic crisis is likely to discourage spending by the oil exporting countries. Reflecting what has by now become conventional wisdom, the World Bank advocates fiscal stimulus packages by individual countries to cushion the impact of the slowdown. For many developing countries, lower food and fuel prices are perhaps the only silver lining: according to the Bank, food prices may be lower than in the 1990s but are still at levels that would not discourage supply. In this global economic crisis, non-availability of credit has compounded the problems and resulted in a massive contraction of demand. Even as countries are groping for solutions, more pessimistic reports may well emerge in the near term.

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