World Bank sees global recession in 2009 on consumer pull-back, credit crunch

The World Bank said the global economy will enter a recession for the first time since 1982. Equally distressing, international trade will also decline from 2007 levels.

Incredibly, the bank said it now expects global GDP growth to decline to a scant 0.9% in 2009 from 2.5% in 2008. That is a recession for the global economy, as any global growth rate under 2.0% is tantamount to a recession, economist David H. Wang said.

"This is very concerning news, if the World Bank's forecast proves to be accurate," Wang said. "Up to now many forecasts had global growth in the 1.5-2.0% range for 2009. My own estimate was for 1.8-2.0% GDP growth. A GDP rate below 0.9% is a major recession, which will mean higher unemployment, lower corporate revenue, and decreased trade, in most nations."

Further, global trade is expected to decline 2.1% in 2009, the bank said, its first decline since 1982, on reduced global demand and export credits.
The World Bank said the financial crisis has sharply reduced investment, a key pillar that supported the strong GDP growth in emerging markets during the past five years. Tighter credit conditions and reduced appetite for risk will lower investment growth in the developing world to 2.5% in 2009 from 13% in 2008. "That's like going from 60 miles per hour on a highway to driving at about 15 miles per hour, a rate that's way to slow," Wang said. "The global economy is slowing now not just due to decreased demand, but also due to a lack of credit."

GDP growth in developing countries will likely slow to 4.5% in 2009 from 7.9% in 2007, the bank said. Growth in rich countries, which includes many developed economies such as the U.S. and the E.U., will likely be negative in 2009.
Economic Analysis: Along with continued central bank efforts to keep money markets liquid, the above forecast will provide more evidence for the need for fiscal stimulus -- in all major economic regions of the world (U.S., E.U., Asia) -- to fill the void created by cutbacks in business investment and consumer spending. It also speaks to the need for both emerging markets and developed nations to create internal, sustainable, domestic growth engines -- such as renewable energy industries and other 'green' sectors -- as export sales are not likely to play as large a role in GDP growth during the next economic expansion.

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