World Bank – Prospects of World Economy 2009 & Implications
Global Investment House – World Bank Global Outlook in Summary - In its recently published report on prospect of world economy in December, the World Bank forecasted a dismal picture of the global economy in 2009, with growth weakening to a meager 0.9 percent and trade volume falling by 2.1 percent, falling for the first time since 1982.
The Global Outlook in Summary
(Percentage change from previous year, except for interest rates and oil prices)
Indicator 2006 2007 2008* 2009^ 2010^
Global conditions
World trade volume 9.8 7.5 6.2 -2.1 6.0
Commodity prices(US$)
Non-oil commodities 29.1 17.0 22.4 -23.2 4.3
Oil price (US$ per barrel) 64.3 71.1 101.2 74.5 75.8
Oil price (percent change) 20.4 10.6 42.3 26.4 1.8
Interest rates
US$ LIBOR, 6-month (percent) 5.2 5.3 3.3 1.9 2.5
EURIBOR, 6-month (percent) 3.1 4.3 4.9 3.8 4.2
Real GDP Growth
World 4.0 3.7 2.5 0.9 3.0
High Income Countries 3.0 2.6 1.3 -0.1 2.0
United States 2.8 2.0 1.4 -0.5 2.0
Euro area 2.9 2.6 1.1 -0.6 1.6
Japan 2.4 2.1 0.5 -0.1 1.5
Developing Economies 7.7 7.9 6.3 4.5 6.1
Russia 7.4 8.1 6.0 3.0 5.0
China 11.6 11.9 9.4 7.5 8.5
India 9.7 9.0 6.3 5.8 7.7
Brazil 3.8 5.4 5.2 2.8 4.6
Middle East & North Africa 5.3 5.8 5.8 3.9 5.2
Source: World Bank, December 2008 * Estimate ^ Forecast
According to the report, developing countries' economies would likely expand at an annual pace of 4.5 percent while wealthier, developed economies are expected to contract 0.1 percent. The report forecasts that the Middle East and North Africa region would grow at a rate of 3.9 percent much lower than 5.8 percent it had grown in 2007 and 2008 expectations.
According to Justin Lin, the chief economist of the World Bank, the global economy is at a crossroads, transitioning from a sustained period of very strong developing country-led growth to one of substantial uncertainty as a financial crisis rooted in high-income countries has shaken financial markets worldwide.
The latest report was far more pessimistic than the bank's prior 2009 forecasts of global growth of 3.0 percent and 6.4 percent for developing countries, issued in June. They also were gloomier than those of the International Monetary Fund, which forecast the world economy would expand by 2.2 percent and developing economies by 5.1 percent in early November.
The World Bank projected that world trade volume would contract 2.1 percent in 2009, the first decline since 1982. The expected decline in trade volume is driven first and foremost by a sharp drop in demand, as the global financial crisis imposes a rare simultaneous recession in high-income countries and a sharp slowdown across the developing world.
Still, the world economy in 2009 would escape recession, a contraction in activity unseen since 1945. But the weak 0.9 percent economic growth rate would be less than the rate of population growth, which the United Nations has estimated at an average of 1.1 percent in the 2005-2010 period.
We estimate that the GCC economic growth rates as a whole, which has grown at high rates of over 5 percent in the recent past on the back of high oil prices and estimated to have grown by around 7 percent in 2008, is too likely to take a hit as a result of the reduced demand of oil and consequent fall in oil prices and is expected to grow at around 4 percent in 2009.
Great uncertainty surrounds the implications of this crisis for developing countries. Initially, the repercussions for developing countries of the financial turmoil that characterized 2007 and the first half of 2008 were limited. However, since September 2008, the intensification of the banking crisis, the collapse of several global financial players, and the sharp increase in emerging market bond spreads have dramatically altered the outlook for developing countries which may lead to a sharp slowdown for developing countries and the possibility that serious crises may emerge.
To date, the direct effects of the financial crisis experienced by most developing economies in the region have been relatively mild. Banks and investment companies in the Middle East and North Africa were not large holders of subprime mortgage-backed securities, or “toxic assets” (though there may be questions concerning portfolios of sovereign wealth funds in the Gulf States). Indirect effects, however, have become evident and taken serious prepositions. Following the announcement of the U.S. financial rescue plan in early October 2008, spreads on sovereign debt increased. Significantly tighter lending standards across the board and higher borrowing costs for the whole industry are having a substantial impact on real estate prices. Banks are facing tough times due to the global credit crunch which was a major source of collation of funds. With credit difficult to come by, financing got difficult with some companies needing to scrap or postpone their projects. This got converted to a chain reaction which led to tumbling stock prices.
Following a series of efforts by central banks and governments to resolve the growing crisis through liquidity injections and various ad hoc measures, policy makers have now acted forcefully to restore confidence in the international banking system. Notwithstanding these steps, growth prospects for both high-income and developing countries have deteriorated substantially, and the possibility of a very deep global recession cannot be ruled out.
For 2010, the World Bank ventured that the global economy would rebound to growth of 3.0 percent and a 6.0 percent rise in trade volume. While this sober outlook represents a likely outcome, a wide range of outcomes remains possible. The regional growth could be lower than forecasted in case of a sharper and more prolonged slowdown in advanced economies, and if the effects from the financial turmoil become more pronounced it may take a while before the markets bounce back.
The governments in the MENA region have amassed huge reserve funds which they could deploy now to support and sustain regional growth. The government has saved 70% of their surplus oil revenues over the past five years and Sovereign wealth funds in the MENA region have over US$1.5 trillion at their disposal. Therefore, this is the time that the governments need to come out in full support and give the much needed impetus to the economies which would ultimately bring in more employment, diversify the economies and ultimately benefit the economy in the longer run. This would help restore some confidence in the market and provide the much needed cushion. The liquidity and fiscal stimulus would help that the momentum of the economy does not come to a standstill.
