Global Economy to Shrink First Time Since WWII, World Bank Says

By Christopher Swann, Bloomberg  

March 9 (Bloomberg) -- The global economy is likely to shrink for the first time since World War II, and trade will decline by the most in 80 years, the World Bank said. 

The World Bank’s assessment is more pessimistic than an International Monetary Fund report in January predicting 0.5 percent global growth this year. The Washington-based World Bank didn’t provide a specific estimate in its report yesterday. 

World growth will be 5 percent below its potential, the bank said. Developing nations will bear the brunt of the contraction. They will face a shortfall of between $270 billion and $700 billion to pay for imports and service debts, the bank said. 

“We need to react in real time to a growing crisis that is hurting people in developing countries,” said World Bank President Robert Zoellick in a statement. Action is needed by governments and multilateral lenders “to avoid social and political unrest.” 

East Asia will be hit the hardest by the decline in global commerce, the bank said. Global industrial production is expected to be as much as 15 percent lower than in 2008. 

The World Bank said that a surge of debt issuance by rich nations risks “crowding out many developing country borrowers, both private and public.” Emerging nations that can access capital markets will be forced to pay higher rates of interest. 

The report said that 94 out of 116 developing countries had experienced a slowdown in economic growth, with poverty increasing in 43. The economic crisis will swell the ranks of the poor by 46 million this year, the report says. The result would be growing dependence on foreign aid. 

‘Bigger Bang’ 

Justin Lin, the bank’s chief economist, said that developed nations should funnel part of their stimulus spending to poorer countries where it would be more effective at boosting demand. Channeling infrastructure investment to the developing world can have a “bigger bang for the buck,” he said. 

Developing nations will be hurt by tighter credit, withdrawals of foreign direct investment, and a decline in the amount of money sent home by workers overseas, the report said. The decline in such remittances will have the biggest impact in countries including Honduras, Lebanon and Tajikistan. 

Maturing debt is another major risk for many emerging nations, the report said, estimating that more than $1 trillion of corporate debt and as much as $3 trillion on government debt will come due this year. 

To contact the reporters on this story: Christopher Swann in Washington at cswann1@bloomberg.net

Related Articles:

EU backs IMF fund boost as economic gloom deepens

Developing world may need $700 billion - World Bank