World Bank cuts 2009 growth forecast

0 Comments | Deseret News (Salt Lake City), Jun 23, 2009 | by Joe McDonald Associated Press

BEIJING -- The World Bank has cut its 2009 global growth forecast, saying the world economy will shrink by 2.9 percent and warning that a drop in investment in developing countries will increase poverty.

"The global recession has deepened," the Washington-based multilateral lender said in a report.

The surprisingly bleak forecast for the world economy pushed U.S. stocks to their biggest loss in two months.

Major stock indexes tumbled by more than 2 percent Monday, sending the Dow Jones industrial average down 201 points, after the World Bank estimated the global economy will shrink 2.9 percent in 2009. It previously predicted a 1.7 percent contraction.

The grim assessment was the latest unwelcome surprise for the market since last month and further eroded hopes that the economy was starting to emerge from recession. Investors began driving stocks sharply higher in early March, encouraged by modest improvements in housing, manufacturing and even unemployment.

The dampened economic outlook from the World Bank, a global lender based in Washington, also weighed on the prices of oil, metals, and other commodities. Those price drops in turn sent energy and metal producers' shares falling.

Hugh Johnson, chief investment officer of Johnson Illington Advisors, said the downbeat economic prediction confirmed fears that have been building in the market for two weeks.

"The forecast by the World Bank just dramatized that the market may have overstated what's coming for the economy," he said.

Global trade is expected to plunge by 9.7 percent this year, while total gross domestic product for high-income countries contracts by 4.2 percent, the bank said. It said economic growth in developing countries should slow to 1.2 percent -- but excluding relatively strong China and India, developing economies will contract by 1.6 percent.

The bank's latest forecast is a sharp reduction from its March prediction of a 1.7 percent global contraction, which it said then would be the worst on record.

Economic damage to developing countries "has been much deeper and broader than previous crises," warned the report, issued Sunday in Washington.

"Unemployment is on the rise, and poverty is set to increase in developing economies," it said.

The global economy should start to grow again in late 2009, but "the expected recovery is projected to be much less vigorous than normal," the report said. It said banks' ability to finance investment and consumer spending would be hampered by the overhang of unpaid loans and devalued assets.

"To break the cycle and revive lending and growth, bold policy measures, along with substantial international coordination, are needed," the World Bank said.

Investment and other financial flows to developing countries plunged by an estimated 39 percent in 2008 to $707 billion, the World Bank said. It said foreign direct investment in developing countries is projected to drop by 30 percent this year to $385 billion.

Eastern Europe and Central Asia have been hit hardest and the region's gross domestic product is expected to plunge by 4.7 percent this year, the bank said. It said growth should recover next year to 1.6 percent.

GDP in Latin America and the Caribbean should shrink by 2.3 percent this year before rebounding to expand by 2 percent in 2010, the report said.

In the Middle East and North Africa, growth is expected to fall by half this year to 3.1 percent, while that of sub-Saharan Africa will drop to 1 percent from an annual average of 5.7 percent during the past three years, the bank said.

East Asia should post a 5-percent expansion, supported in part by China's stimulus-fueled growth, the bank said.