[Marxism] Dire Forecast for Global Economy

Louis Proyect lnp3 at panix.com
Wed Dec 10 07:22:38 MST 2008

NY Times, December 10, 2008
Dire Forecast for Global Economy and Trade

WASHINGTON — The world economy is on the brink of a rare global 
recession, the World Bank said in a forecast released Tuesday, with 
world trade projected to fall next year for the first time since 1982 
and capital flows to developing countries predicted to plunge 50 percent.

The projections are among the most dire in a litany of recent gloomy 
forecasts for the world economy, and officials at the World Bank warned 
that if they proved accurate, the downturn could throw many developing 
countries into crisis and keep tens of millions of people in poverty.

Even more troubling, several economists said, there is no obvious engine 
to drive a recovery.

American consumers are unlikely to return to their old spending habits, 
even after the United States climbs out of its current financial crisis. 
With growth in China slowing sharply, consumers there are not about to 
pick up the slack from the Americans. The collapse in oil prices — a 
side effect of the crisis — has knocked the wind out of consumers in 
oil-exporting countries.

“We know that the financial crisis now is likely to be the worst since 
the 1930s,” said Justin Lin, the chief economist of the World Bank, 
summarizing the projections.

The bank forecasts the global economy will eke out growth of 0.9 percent 
in 2009, down from 2.5 percent this year and 4 percent in 2006. That is 
the slowest pace since 1982, when global growth was 0.3 percent. 
Developing countries will grow an average of 4.5 percent next year — a 
pace that economists said constituted a recession, given the need of 
these countries to grow rapidly to generate enough jobs for their 
swelling populations.

“You don’t need negative growth in developing countries to have a 
situation that feels like a recession,” said Hans Timmer, who directs 
the bank’s international economic analyses and projections. He predicted 
rising joblessness and closed factories in many developing countries.

The volume of world trade, which grew 9.8 percent in 2006 and an 
estimated 6.2 percent this year, will contract by 2.1 percent in 2009, 
the report said. That drop would be deeper than the last major 
contraction in trade: 1.9 percent in 1975.

Net private flows of capital to developing countries are projected to 
decline to $530 billion in 2009, from $1 trillion in 2007.

The loss of that capital will sharply constrict investment in 
emerging-market economies, the report said, with annual investment 
growth slowing to 3.5 percent in 2009 from 13.2 percent in 2007.

Several countries are also being hurt by the decline in the prices of 
oil and other commodities — a phenomenon the World Bank characterizes as 
the end of a five-year commodities boom — though the decline in food and 
fuel costs has relieved the pressure on people in other countries.

The sudden drop in capital flows poses a particular danger to oil 
exporters, some of whom have run up heavy debts.

“They’ll have to roll over that debt, one way or the other,” said Simon 
Johnson, a former chief economist of the International Monetary Fund. 
“That’s going to put a huge squeeze on these countries.”

Mr. Johnson said the calmer atmosphere in foreign markets belied the 
gravity of the situation. Spreads on credit default swaps — a common 
yardstick for whether a country’s government is in danger of default — 
continue to signal potential trouble for Ireland, Italy and Greece.

The authorities in Greece are battling violent street protests in Athens 
and its suburbs, caused in part by the deteriorating economy.

Reflecting what is by now conventional wisdom, the World Bank 
recommended that countries undertake large fiscal stimulus programs to 
cushion the downturn. The bank itself has committed up to $100 billion 
in aid to developing countries over three years.

If there is a silver lining amid the gloom, it is the relief that lower 
food and fuel prices mean for poorer countries. While the prices of 
almost all commodities have fallen sharply since July, they remain 
higher than in the 1990s, which the bank says should prevent future 
supply shortages.

As the World Bank’s experts struggled to find a historical analog for 
the slump, they said it had more in common with the Depression of the 
1930s than with the severe recessions of the 1970s or 1980s.

“It is not just a supply shock,” Mr. Timmer said. “It is not just a 
reduction in demand, but it is the lack of availability of credit.”

Deutsche Bank, in a forecast issued this week, was even more 
pessimistic. It said global growth would drop to 0.2 percent in 2009, 
with the United States, Europe, and Japan in recessions of roughly equal 

China, which grew 11.9 percent in 2007, will slow to 7 percent next 
year, the bank projects, and 6.6 percent in 2010, when the rest of the 
world is slowly recovering. “It’s not going to be the spark that 
reignites global demand,” said Thomas Mayer, the chief European 
economist for Deutsche Bank. “We’re almost in an air pocket, where we 
don’t have a new global driver of growth.”

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