The World Bank is warning of an economic recovery that could be both slow and painful as it increased estimates of economic contraction for the US, Japan and Europe. High unemployment in many developed economies is expected to contribute to a slower than normal recovery. For more on this story, see the following article by Money Morning.
The World Bank yesterday (Monday) lowered its growth forecast for the global economy and warned about a long and painful recovery in developed economies, underscoring the recent supposition by many analysts that a three-month rally in U.S. stocks has been overdone.
In its annual Global Development Finance (GDF) report, the World Bank warned that recovery is “unusually uncertain” and that it expects the global economy to contract by 2.9% this year. The World Bank said as recently as March that the global economy would shrink by 1.7% in 2009.
“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 bank said in its report. “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.”
In the United States, where the unemployment rate is approaching double-digits, the economy is now expected to shrink by 3% this year, rather than the 2.4% the World Bank predicted in March. This is more consistent with U.S. Federal Reserve Chairman Ben S. Bernanke’s warning of a “jobless recovery.”
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The World Bank said the Eurozone is now facing an economic contraction of 4.5% after previously predicting a 2.7% decline. Japan’s economy will shrink by as much as 6.8% this year, up from 5.3% contraction it predicted three months ago.
The world’s second-largest economy has been leveled by a sharp drop in exports and soaring unemployment, as evidenced by an annualized 15.2% drop in first-quarter gross domestic product (GDP).
Developing countries will still see growth in 2009, although it is likely to come at a much slower pace. Developing economies will grow by 1.2% on the whole, compared to a 5.9% expansion in 2008 and 8.1% growth in 2007. China and India will be the major growth engines of the developing world, expanding 7.2% and 5.1% respectively. Without these two dynamic economies developing nations would actually contract 1.6% according to World Bank projections.
The economies of Brazil and Russia, which rely heavily on commodities prices, are expected to shrink 1.1% and 7.5% respectively.
While the World Bank expects global growth will rebound to 2% in 2010 and 3.2% by 2011, growth in developing nations will be higher. The bank sees 4.4% growth in emerging markets in 2010 and 5.7% in 2011.
The World Bank’s revelation helped temper some of the optimism that has fueled the recent stock market rally. U.S. stocks suffered their first weekly loss since May last week, and both the Dow Jones Industrial Average and Standard & Poor’s 500 Index logged heavy losses yesterday. The Dow closed down 201.3 points, or 2.35%, at 8338.7 and the S&P tumbled 28.17 points, or 3.06%, to close at 893.05.
This article can also be viewed at Money Morning’s investment news website.