World Bank expects recession to deepen

The recession will be deeper than expected, but Gulf economies will fare better than the global average, the World Bank said yesterday. The expected contraction in global economic output will threaten the fragile economies of developing countries and increase the numbers of the world's poor and unemployed, the bank said in its Global Development Finance report. "Prospects for recovery in the developing countries in the Middle East and North Africa will depend importantly on the strength of the eventual revival of growth in Europe and in the GCC countries," the bank said. The global economy will contract 2.9 per cent, it predicted. It had previously forecast a contraction of 1.7 per cent, but increased this after taking into consideration signs that the international repercussions from the global financial crisis continued to grow. The projections pushed the price of oil lower for a second day while US stock futures also fell. The World Bank's global growth estimate is more pessimistic than the most recent forecast from the International Monetary Fund, which predicted a contraction of 1.3 per cent this year and forecast the UAE's economy would shrink by 0.6 per cent. While the World Bank did not publish a forecast for the UAE, local economists predict the country's economy will contract by 0.8 per cent this year, according to a survey conducted by The National. Justin Lin, the chief economist of the World Bank, said: "The crisis of the past two years is having dramatic effects on capital flows to developing countries, and the world appears to be entering an era of lower growth." The bank called for increased international co-ordination on efforts to combat the effects of the crisis, saying the newly integrated nature of the world economy would diffuse local attempts to stimulate growth and potentially threaten the finances of individual states. "Any country that acts alone, even the United States, may reasonably fear that increases in government debt will cause investors to lose confidence in its fiscal sustainability and so withdraw financing," the report said. Since the onset of the financial crisis, most GCC economies have pledged to increase government spending this year, even though this could result in a budget deficit for some of them. However, analysts say countries in the region are unlikely to face the same scale of problems as the West. Philippe Dauba-Pantanacce, an economist at Standard Chartered Bank in Dubai, said repaying a deficit "should not be seen as a problem in this region. Substantially lower oil prices can only be a temporary phenomenon, and the guarantee of comfortable future revenues significantly exceeds the outlook period." During the past six months the oil price has risen from lows of about US$42 a barrel to above $70, a change which some analysts have said signals an approaching rebound in the global economy. The World Bank also increased its estimates for how far economies would shrink in developed countries, lowering Japan's outlook from a previous estimate of minus 5.3 per cent to minus 6.8 per cent this year, and the Euro zone from minus 2.7 per cent to minus 4.5 per cent. World trade volume will also shrink by 9.7 per cent this year, the bank said. Adding to the negative news from the World Bank, the head of the Organisation for Economic Co-operation and Development (OECD) agreed that developing countries would continue to face problems this year. "We see a very difficult 2009, with negative growth in the OECD area. Unemployment problems are going to continue to linger," Angel Gurria, the secretary general of the OECD, told Reuters yesterday. tpantin@thenational.ae