Very deep global recession possible: World Bank

10 Dec 2008, 00:00 hrs IST, AGENCIES

WASHINGTON: Economic growth prospects for both high income
and developing countries have deteriorated substantially and the possibility of a very deep global recession cannot be ruled out, the World Bank said on Tuesday.
The international banking crisis that erupted in September 2008 after more than a year of less acute financial turmoil has substantially reinforced the cylical downturn that was already under way, the bank said a report devoted to assessing economic prospects for 2009.

``Following the insolvency of a large number of banks and financial institutions in the United States, Europe and the developing world, financial conditions have become much tighter , capital flows to developing countries have dried up and huge amounts of market capitalization have evaporated,'' the bank said.

The bank predicted world economic growth will be 2.5 per cent in 2008 and 0.9 percent in 2009. It said developing countries will likely grow 4.5 percent next year, down from 7.9 per cent in 2007, while growth in high income countries will turn negative.

Even if the strong measures governments took to restore confidence in the international banking system work and credit begins to thaw, a number of developing countries are likely to be subjected to substantial strains, possibly including bank failures and currency crises, the bank said.

``In these very uncertain circumstances,” the bank said, ``policy makers must place a premium on reducing the likelihood of domestic turmoil by reacting swiftly and forcefully to emerging difficulties, including, if necessary, seeking assistance from the International Monetary Fund.'''

The IMF provides rescue packages to countries experiencing financial crises while the bank, its sister institution, lends money or makes grants for development projects.

``People in the developing world have had to deal with two major external shocks, the upward spiral in food and fuel prices followed by the financial crisis, which has eased tensions in commodity markets but is testing banking systems and threatening job losses around the world,'' said Justin Lin, the bank's chief economist ``Urgent steps are needed to help reduce fallout from the crisis on the real economy and on the poorest.''

In response to the crisis the bank said it was increasing its support for developing countries, through new spending commitments of up to $100 million over the next three years. The bank said its private sector arm, the International Finance Corp, would help by providing trade financing, helping banks recapitalize or aiding infrastructure projects facing financial distress.

via:E.T