The World Bank says the global economy is likely to shrink for the first time since World War II this year and trade will suffer its biggest fall in 80 years, while the International Monetary Fund has urged countries to spend more on stimulating their economies without delay.
The World Bank report is of special interest to Australia because it forecasts that the deepest falls in trade will occur in our area: East Asia, where the collective falls in output, exports and imports in Japan, South Korea, Taiwan, Hong Kong, Singapore, Vietnam and Thailand will outweigh whatever happens to Chinese output, exports and imports.
In the first of what will be a flood of reports and opinions ahead of the Group of 20 nations meeting on 2 April, the two organisations called for more aid and help for both developed and developing countries.
While it didn’t provide an estimate for global growth this year (that will come closer to 2 April the World Bank’s assessment is more pessimistic than the IMF, which has forecast that the world economy will grow by just 0.50%.
The IMF will issue new forecasts ahead of the 2 April meeting and will predict negative growth this year and next (the Fund forecast a 3% growth rate for the world in 2010).
According to the World Bank:
The global economy is likely to shrink this year for the first time since World War Two, with growth at least 5 percentage points below potential. World Bank forecasts show that global industrial production by the middle of 2009 could be as much as 15 percent lower than levels in 2008. World trade is on track in 2009 to record its largest decline in 80 years, with the sharpest losses in East Asia.
The financial crisis will have long-term implications for developing countries. Debt issuance by high-income countries is set to increase dramatically, crowding out many developing country borrowers, both private and public. Many institutions that have provided financial intermediation for developing country clients have virtually disappeared. Developing countries that can still access financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future.
The report said that 94 out of 116 developing countries had experienced a slowdown in economic growth, with poverty increasing in 43. The result, the bank said, would be growing dependence on foreign aid as developing countries face a financing shortfall of $US270-$US700 billion this year.
Earlier, the IMF said governments have to consider taking new stimulus measures through 2010 as the current global economic downturn continues.
And in comments that will resonate in Australia, the Fund says Governments shouldn’t delay and should spend sooner, rather than later:
“Given the depth of the crisis, avoiding or postponing action is not a viable option and would come with significant downside risks in terms of further deepening or prolonging the recession.”
The IMF said it was “particularly important for fiscal policy to take on an increased share of the burden during the period in which the financial sector is recovering and is not yet able or willing to extend credit to households and businesses to the extent that it normally does.”
Given the anticipated weakness in the global economy over the next two years, consideration should be given to providing fiscal stimulus that goes beyond the measures already announced
Given the likelihood that the economic weakness will continue into 2010, there should be less concern that the expenditures will only be put into place once the economy has begun to recover.
Fiscal authorities have acted globally, but so far the stimulus packages outside the United States have largely been front-loaded by concentrating spending in 2009, with much less to come in 2010.
In these regions, if there is enough fiscal space to do so without endangering the sustainability of government debt, consideration should probably be given to additional fiscal stimulus packages.
The IMF’s call is a repudiation of a slow now, ‘reserve your firepower’ approach that the Federal Opposition, led by Joe Hockey, the Treasury spokesman, has adopted. He in turn took the idea from Professor Warwick McKibbin, a member of the Reserve Bank board. Professor McKibbin says his were private views.
The IMF now says they are not a “viable option”.
If the Federal Opposition and Mr Hockey reject these comments from the IMF, they will fall into line with former Prime Minister, Paul Keating, who reckons the IMF is irrelevant. Mr Hockey has already supported Mr Keating’s criticisms of the Federal Government’s direct cash payments to taxpayers.
“It is essential in our view that public sector authorities play their appropriate role in preventing a collapse of confidence in the private sector that might lead to a vicious downward spiral,” the Fund said.
Keating is right about the IMF and also the World Bank.
Not only will Hockey be on the same wavelength as PK, if that is possible for anyone, he will be endorsing the lecture given by Putin at Davos and will be falling into line with NZ Prime Minister John Key whom I believe has a great approach. Key received a nice piece in the WSJ August 6, 2009. Journalist Mary Kissel notes that Key’s approach is the antithesis of the Keynesian gruel being doled out to the Australian population as well as most other bedevilled OECD constituencies. According to Key:
“We don’t tell New Zealanders we can stop the global recession, because we can’t,” What we do tell them is we can use this time to transform the economy to make us stronger so that when the world starts growing again we can be running faster than other countries we compete with.”
Well what a great idea! Kissel’s article points out that the idea of growing a nation out of recession by improving productivity puts John Key at odds with Washington, Tokyo and Canberra.
Like the rest of the West, we are using what’s left of the surplus as well as borrowing to billy-o to prop up growth through spending on projects that don’t generate growth. Creating jobs for 1000 tradesmen in Gippsland is all very fine but it means that 1000 tradesmen elsewhere won’t have jobs. All Keynesian economics has ever done is rearrange the deck chairs on the Titanic. Unfortunately for the public, it takes about five years for people to work out that it doesn’t work by which time its proponents have all left town.
According to Key, “You’ve saddled future generations with an enormous amount of debt that they have to repay. Key even admits there is a limit to what governments can do. What that means is that ultimately the market decides what is fair and what is unfair, what works and what doesn’t and whose telling fibs and who isn’t. That, in my opinion, may be why the US market seemingly collapses after every Obama speech.
Now it just so happens that Julie Bishop’s unreported speech to the Sydney Institute last week made many similar points but in the view of the Keynesian mind- controlled media, there is only one option – all the economics has been done and passing out cash to everyone who doesn’t have it (taken from those who do) is the only option. This amounts to stealing the life savings of the elderly and the thrifty and giving it to the intemperate and wasteful. Well I say “bollocks” and plead with the Opposition to bone up on Austrian Economics before this economic-rationality-challenged government brings the economy completely to its knees. We are well placed in this country to take advantage of the changes to come but not if we are faced with massive debt before we even get started.