World Bank: recession worst since Great Depression

The world could go through its worst recession since the Great Depression as a massive financial crisis has slashed global investment and sharp drops in commodity prices severely hurt poor-country exports, the World Bank warned. The global development bank slashed its previous estimates for global growth to 2.5 percent in 2008 and 0.9 percent in 2009, well below the three percent rate typically considered the dividing line between global growth and contraction.

“The financial crisis is now likely to result in the most serious recession since the 1930s,” said the World Bank’s chief economist Justin Lin, as the group released its annual report on the global economy. The current economic slowdown has lasted longer and been spread wider than recessions in past decades, leading to a contraction in most wealthy nations and a sharp slowdown in emerging countries, the bank said. The bank’s analysis pointed to a number of indicators of a dramatic slowdown.

Global trade volumes will fall 2.5 percent in 2009, the first contraction since 1982. Worldwide investment will fall about 50 percent in 2009 compared to 2007. The financial crisis has cut access to loans in advanced and developing countries, pulling investment out of poorer nations and reducing consumer spending. Lin urged any countries with “fiscal space” to boost government spending to avert a sharper slowdown. No region has shown itself immune to the crisis, the World Bank said. Economies in Europe, the US and Japan are already contracting.

Growth across the developing world will fall to 4.5 percent in 2009, compared to 7.9 percent in 2007. Hans Timmer, a co-author of the new report, said the emerging markets’ slowdown is well below their potential growth of about 6.5 percent - given continuing population increases - meaning the downturn will likely lead to rising unemployment and factory closings. “You don’t need negative growth in developing countries to have a situation that feels like a recession,” Timmer said.

A record surge in energy, food and metal prices in the first half of 2008 has plunged between 130 and 155 million new people into poverty as families struggled to pay for food and fuel, the bank said. But the sharp drop in commodity prices since the summer has hurt poorer nations’ exports and added to the global recession. The World Bank still expected commodity prices to remain far higher in future than in the last decade as emerging countries continue to demand more resources.

Oil prices will average USD 75 per barrel in 2009, the bank said. Crude oil is currently below USD 40 but stood above USD 140 per barrel in July. Lin urged all countries with the ability to increase government spending to use it to boost domestic demand. But he warned that wealthy nations must invest in projects with long-term benefits, such as clean energy or much-needed infrastructure improvements.