The World Bank's Dark Vision

bearThe seers at the World Bank have broken with most other forecasters and believe that global GDP will contract violently this year and may not recover next year.

According to Reuters, World Bank President Robert Zoellick said “I personally believe you might be able to see some aspects of recovery in 2009 and 2010, but from a policy point of view, that isn’t the core question because we have a large degree of uncertainty.”

In March, the agency said it expected global GDP to drop 1.75% this year. It has revised that number to 3%.

Zoellick may have a powerful point, especially if the trend toward rising sovereign borrowing and increasing fuel prices continues. A number of the world’s largest nations, particularly the US and UK, are in the world financial markets raising hundreds of billions of dollars. They are competing with borrowing by private enterprises for a huge but limited supply of money, pushing interest rates higher. Those higher rates eventually affect enterprise and consumer borrowing, making credit expensive. Engineering a recovery in the face of expensive capital rarely works.

The global economy also faces the specter of much higher fuel prices. Business activity and consumer spending are going to be damaged by the need to put more and more capital toward running airplanes, trucks, and cars. The rising cost of petrochemicals will increase the cost of goods in a number of industries.

The most difficult hurdle to a recovery in the largest nations is that stimulus package money will run out, in some cases in 2010. Economies that have not recovered enough to stand on their own will find that the foundation created by government spending has disappeared, in some cases moving GDP back to red numbers. Nations that wish to renew their stimulus efforts will have to raise more capital in a market with markedly higher interest rates.

The global economy may be past a trough, but that does not mean it cannot slip again.

Douglas A. McIntyre

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