Slump 'bleaker' than forecast

The World Bank says the global recession this year will be deeper than it predicted in March and warns that a flight of capital from developing nations will swell the ranks of the poor and the unemployed.

The world economy is forecast to contract 2.9 per cent this year, compared with a previous estimate of a 1.7 per cent decline, the Washington-based lender said in a report released yesterday.

Global growth will return next year with a 2 per cent expansion, the bank said, cutting its forecast from a 2.3 per cent prediction three months ago.

The bank, formed after World War II to fund health and development projects in poor countries, said that while a global recovery may begin later this year, poor economies will lag rich nations in seeing any benefits. The lender called for "bold" policy actions to hasten a rebound and said prospects for rounding up aid for the poorest countries was "bleak."

"While the global economy is projected to begin expanding once again in the second half of 2009, the recovery is expected to be much more subdued than might normally be the case," the report said. "Unemployment is on the rise, and poverty is set to increase in developing economies, bringing with it a substantial deterioration in conditions for the world's poor."

The World Bank's report raised concern about the shrinking amount of capital flowing into developing countries. After a peak of $1.2 trillion in 2007, capital flows this year are expected to fall to $363 billion.

"Investors' flight from perceived danger contributed to the sharp drop in capital flows to the developing countries, a trend that is very likely to persist through the end of 2009," the report said.

With less capital coming in, growth in the developing world will be 1.2 per cent this year, the World Bank said, scaling its outlook back from a 2.1 per cent prediction in March.

"Low-income countries face increasingly grave economic prospects if the dramatic deterioration in their capital inflows from exports, remittances, and foreign direct investment is not reversed in 2010," the report said.

As a result, "developing countries will most likely face a dismal external financing climate in 2009," and net private flows will "barely" be positive.

The bank downgraded its forecast for the United States this year, calling for a 3 per cent drop in its economy, after predicting a 2.4 per cent contraction in March.

Japan's gross domestic product will shrink 6.8 per cent this year, more than the prediction in March for a 5.3 per cent decline, while the European area will shrink 4.5 per cent, instead of the 2.7 per cent contraction forecast.

The International Monetary Fund is more optimistic and forecasts a global contraction of 1.3 per cent, with growth returning to 2.4 per cent in 2010.

Developing nations in eastern Europe and Central Asia will be some of the hardest hit, the World Bank said. The region is likely to shrink 4.7 per cent this year.

Latin America and the Caribbean are likely to decline by 2.2 per cent this year, while growth is expected to slow in East Asia and the Pacific, the Middle East and North Africa, South Asia and Sub-Saharan Africa.

- BLOOMBERG