A dire economic forecast for 2009

NY Times:

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.

“The financial crisis is likely to result in the most serious recession since the Great Depression,” 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 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 3.4 percent in 2009 from 13 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.

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Does this mean the "greatest transfer of wealth in the history of the world" is over? I hope so. The cut in the price of oil is like a tax cut for those of us who buy gas on a regular basis. It also means it is cheaper to fill my propane tank. As for those debtor oil producers, they can at least role their loans at a lower rate.

It should also mean that people like Hugo Chavez and Ahmadinejad will have less money with which to cause trouble for others. It reduces the influence of some really bad people.

The fall of the Mongol dynasty began with a disease spread by fleas on rats that spread all the way to Europe where it was called the Black Plague. With all the deaths came a devastating halt to world trade that was spreading prosperity and enlightenment.

The Democrats are showing signs of the same disease with their attacks on free trade and their opposition to free trade agreements. That is a prescription that will make this economic downturn steeper and longer.

It appears that much of their economic recovery plans depends on spending money to put some construction workers back to work as well as sink hole investments in some industries. I would much rather see that money spent on buying enough autos to make the companies profitable and at least getting some tangible assets that can be used by the military and other government workers.