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World Bank: Growth May Wilt As Stimulus Fades

Wednesday, 20 Jan 2010 11:59 PM

 

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The global economy will suffer the fallout from the financial crisis for years to come, the World Bank said Thursday in a report warning that growth may wilt later this year as stimulus spending fades.

The Washington-based bank forecasts the world economy will grow 2.7 percent this year, and 3.2 percent in 2011. It contracted 2.2 percent in 2009.

"A great deal of uncertainty clouds the outlook for the second half of 2010 and beyond," the report said.

Though the "acute phase" of the crisis has passed, chronic weaknesses remain. Much depends on the timing of withdrawal from massive stimulus programs and adjustments to monetary policy, the bank said.

Mishandling could result in a "double-dip," with a return to recession in 2011, it warned.

In the U.S., growth is projected at 2.5 percent in 2010 and 2.7 percent in 2011. European economies will see a slower recovery, with growth forecast at only 1 percent in 2010.

China's economy, whose recovery has led the global rebound, will expand by 9 percent this year and the next, the report said. On Thursday, China reported that its economy surged 10.7 percent in the fourth quarter of last year, with annual growth for 2009 at 8.7 percent.

Developing countries will as usual see higher growth rates, at a combined 5.2 percent this year, but will be plagued by shortages of financing and investment that will handicap their progress. Rich countries will grow more slowly, by 1.8 percent in 2010, as fragile financial markets and anemic private demand crimp job creation and investment, the report says.

"Unfortunately, we cannot expect an overnight recovery from this deep and painful crisis, because it will take many years for economies and jobs to be rebuilt. The toll on the poor will be very real," Justin Lin, World Bank chief economist, said in a statement.

While they will do better than industrial nations, developing economies will have growth rates that fall short of their potential due to the deterioration in conditions for financing and growth, the report said. Unemployment will remain a serious problem.

Given the reduced appetite among both investors and financial institutions for risk, money will remain tight — in many cases penalizing the countries least responsible for the frenzy of speculative investments that led to the crisis.

Global investment fell nearly 10 percent in 2009 and will rise only 4.9 percent this year, the report said.

The poorest countries will need between $35 billion and $50 billion in extra funding just to maintain pre-crisis social programs, not taking into account the extra 64 million people pushed into extreme poverty — living on less than $1 a day, due to the crisis, the report said.

But the report notes some positive trends that will cushion the blows from the crisis.

Oil prices will remain stable, averaging about $76 a barrel, it says, while other commodity prices will also rise by a modest 3 percent a year in 2010-2011.

Short-term food shortages and resulting surges in prices have eased, with long-term gains in productivity likely to help ensure supplies for years to come, the report said. But some countries, especially in Africa, are increasingly dependent on costly imports because population growth is outpacing gains in agricultural output.

World trade volumes, which plunged 14.4 percent last year, are expected to rise 4.3 percent this year and 6.2 percent in 2011 — though excess manufacturing capacity will limit gains in jobs and growth.

To ensure the recovery is sustained, China must rebalance its growth by stimulating domestic demand, rather than shifting toward a renewed reliance on exports, the report said, echoing the consensus among most economists and Beijing's own planners.

The report makes only a passing mention of concerns over possible bubbles in property and other asset prices that have prompted China to order banks to tone done a lending spree that pumped 9 billion yuan ($1.3 trillion) into the economy last year alone.

But it does note the need to take lessons from the latest boom-bust cycle to prevent future, destabilizing crises.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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