World Bank: recession will be deeper than expected

The worldwide recession will be far more severe than originally thought, with the global economy set to shrink 3% this year, warned World Bank president Robert Zoellick yesterday.

Zoellick said the world economy would contract by "close to 3%", significantly worse than previous World Bank forecasts in March, which predicted a 1.7% contraction. Growth was expected to revive "during the course of 2010", he continued.

"Most developing country economies will contract this year and face increasingly bleak prospects unless the slump in their exports, remittances and foreign direct investment is reversed by the end of 2010," he added – a significant change from March's forecast, which said poorer countries might see a slowdown, but "will likely avoid the outright contraction in output seen in advanced economies".

Zoellick's latest forecast is also much more pessimistic than the International Monetary Fund's latest prediction in April of a 1.3% contraction this year followed by slow growth in 2010. His prediction of a return to growth during 2010 holds open the possibility of a second year of overall contraction, depending on how soon growth resumes.

The overall shortage of external financing for the developing world in 2009 would be between $350 billion and $635 billion this year –down slightly from the previous upper estimate of almost $700 billion, but still representing a significant problem for poor countries, which have been crowded out by the increased issuance of government debt by rich countries to back their own economic stimulus plans. Zoellick listed four main risks still remaining for the world economy: "the need to clean up the balance sheets and recapitalise banks, address the unique financial risks in central and eastern Europe, guard against a rise in protectionism, and roll over large amounts of private-sector debt in developing countries."

Emerging market bond spreads have recovered considerably since the peak of the crisis last year – according to market data provider Bloomberg, the JP Morgan Emerging Market Bond Index stood at 413.5 basis points today, down from a peak of 890.9bp on October 24, as investors around the world fled to quality in the shape of US Treasury bonds. But this is still higher than pre-crisis levels – for the four years to September 2008, the index had never gone higher than 400 bp.

The full World Bank global development finance report is set to be released on June 22.

See also: World Bank predicts global recession and credit squeeze for poor countries