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.

Peter Fray

72 hours only. 50% off a year of Crikey and The Atlantic.

Our two-for-one offer with The Atlantic was so popular we decided to bring it back.

But only for 72 hours.

Use the promo code ATLANTIC2020 and you’ll get 50% off a year of Crikey (usually $199) and a year of digital access to The Atlantic (usually $70). That’s BOTH for just $129.

Hurry. Ends midnight this Thursday.

Peter Fray
Editor-in-chief of Crikey

Claim Now