World bank warns of growth slump

The global economy will suffer the fallout from the financial crisis for years to come, the World Bank said today.

The Washington-based bank's report warned that growth may wilt later this year as government stimulus packages fade.

The bank forecasts the world economy will grow 2.7% this year, and 3.2% in 2011. It contracted 2.2% 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 had passed, chronic weaknesses remained, it said. Much depended on the timing of withdrawal from massive stimulus programmes and adjustments to monetary policy, it added.

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

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

China's economy, whose recovery has led the global rebound, will expand by 9% this year and the next, the report said.

China reported today that its economy surged 10.7% in the fourth quarter of last year, with annual growth for 2009 at 8.7%.

Developing countries will as usual see higher growth rates, at a combined 5.2% 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% in 2010, as fragile financial markets and anaemic 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, the World Bank's chief economist, said.

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 penalising the countries least responsible for the frenzy of speculative investments that led to the crisis.

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

The poorest countries will need up to US$50bn (€35.47bn) in extra funding just to maintain pre-crisis social programmes, not taking into account the extra 64 million people pushed into extreme poverty - living on less than 61p a day - due to the crisis, the report said.

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

Oil prices will remain stable, averaging about $76 a barrel, it says, while other commodity prices will also rise by a modest 3% 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% last year, are expected to rise 4.3% this year and 6.2% 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 towards 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 $1.3 trillion (€922.5bn) into the economy last year alone.

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

China said today it had recovered from the global crisis after its fourth-quarter growth surge.

But inflation picked up, adding to pressure on Beijing to prevent overheating and keep its economic recovery on track.

"China has become the first, on the whole, to achieve recovery and stabilisation in its economy," said Ma Jiantang, commissioner of the National Bureau of Statistics.

But he said China still faced "uncertainties" and a weak global outlook so the government would avoid major changes in economic policy.