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World Bank Predicts Deeper Economic Contraction

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By Annys Shin
Washington Post Staff Writer
Friday, June 12, 2009

The global economy is set to shrink this year more than previously expected, according to a forecast issued yesterday by the World Bank.

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The bank predicted that the economy will contract at an annualized rate of 3 percent, far worse than the previous estimate of 1.7 percent issued in March. The forecast, which was prepared ahead of this weekend's meeting in Italy of the finance ministers from the eight leading industrialized countries, reflects a widespread view among economists that while the global recession is easing, it remains severe.

Worldwide economic conditions have changed somewhat since the G-8 finance ministers last met in February, with tentative signs of improvement in several member countries.

In the United States, for instance, last week's employment report showed that employers shed fewer jobs in May than anticipated, suggesting job cuts are slowing. Japanese officials yesterday said their economy shrank in the first three months of the year at a fierce pace, but slower than the government had estimated. The IMF said Monday that the decline in the Euro economies, which went into recession in 2008, would moderate in coming months. The agency added that recovery is possible next year.

Although the downturn appears to be losing steam in some developed nations, World Bank President Robert B. Zoellick stressed yesterday that the outlook for developing countries is grimmer.

"Even if the developed world starts on a path to recovery, for many [developing] countries . . . it will take longer," Zoellick said during a conference call with reporters.

Developing nations have been hard-hit by a steep drop in demand for exports, the flight of foreign investment and a decline in remittances. They don't have as much financial wherewithal as developed nations, or the ability to borrow as much money to fund stimulus spending. Falling revenue has made it harder for them to service their debt.

World Bank officials have already noticed more borrowers in Africa are behind in payments, while demand for grants and loans has increased.

During the bank's fiscal year, which ends June 30, lending to low- to middle-income nations more than doubled to a record $33 billion, from $13.2 billion last year. The bank has also handed out a record $13 billion in grants and interest-free loans under a separate program that focuses on the 78 poorest countries.

Even with that help, the bank estimates that developing countries could face a financing gap of $350 billion to $635 billion in 2009.

Zoellick said he is looking for the G-8 finance ministers to uphold their promises to restore the international flow of capital so that "the poor don't pay for a crisis not of their making."


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