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World Bank says global slowdown deep, recovery in 2003

The global economy will rebound strongly out of its deep slowdown next year, but growth rates in many countries will not be high enough to reduce poverty quickly, the World Bank said on Wednesday.

The annual Global Development Finance report comes as the bank is stepping up its efforts to persuade rich countries to open markets and double their relatively slim aid Budgets to meet a set of goals designed to cut by half the number of people living on less than a dollar a day by 2015.

The World Bank said it expects global economic growth to reach 1.3 per cent this year, making the slowdown from 3.9 per cent growth in 2000 the sharpest in 30 years.

"This has been a difficult year for developing countries, associated with the reduction in global growth," World Bank chief economist, Nicholas Stern said at a press conference.

Global growth is expected to pick up again next year to 3.6 per cent but the turnaround is likely to be uneven, the lender said.

The bank, forecasting US growth at 1.3 per cent this year and 3.7 per cent in 2003, concurred with recent comments from US officials and Federal Reserve Chairman Alan Greenspan that signs of a recovery are already evident in the US economy.

However, it warned that fiscal deficits are hard to shake once they have been built up. The Bush administration announced earlier this year it plans to have deficits in the next three years, breaking four straight years of surplus, due to the cost of fighting terrorism and the economic slump.

The bank also predicted a weakening of the US dollar over the next few years due to an adjustment in the current account.

"The adjustment (of the current account) in 2002 and coming years is expected to be accompanied by a gradual weakening of the dollar and a widening of the current account deficits in some European countries," the report said.

The bank forecast continuing problems for the world's second largest economy, Japan, saying that it is more pessimistic on that country than it was last October, warning of major risks to the downside from the banking sector.

"The fragile Japanese banking sector may trigger more adverse developments than is currently assumed," the report said.

The bank expects the Japanese economy to contract 1.5 per cent this year, but to grow 1.7 per cent in 2003.

Meanwhile, the euro zone economy will likely expand 1.2 per cent this year, climbing to 3.3 per cent in 2003, the report said.

DEVELOPING COUNTRIES TO GROW FASTER

According to the World Bank report, the developing world will lead the way to recovery, with East Asia expected to expand at the fastest pace of 5.2 per cent in 2002, soaring to 6.9 per cent next year.

However, uncertainty in Turkey and Argentina still present some negative risks for emerging markets, the bank said.

"The full complement of ramifications stemming from financial crises in Argentina and Turkey remains uncertain," the report said.

The bank said it is inevitable that Argentina suffer rising unemployment and declines in output after the recent peso devaluation.

But Stern also said it was important that Argentina address fiscal issues and banking sector reforms before the arrival of foreign aid.

Argentina's problems, which dragged down growth in Latin America last year, and an uncertain investment climate in Venezuela are the major risks to the region going forward, the bank said.

The bank said it is more pessimistic about Latin America and the Caribbean than it was in October, now predicting just 0.5 per cent growth for this year.

The rebound will be the least pronounced in poor commodity dependent countries, particularly in Sub-Saharan Africa. The Middle East and Africa will be the slowest growing regions in the developing world in 2003 and 2004, the report said.

The bank noted that foreign aid to poor countries declined over the last year, widening the gap between the availability of aid and the needs of the poorest countries.

Like World Bank President James Wolfensohn last week, Stern urged rich countries to boost their aid donations. The report noted that only six countries have reached the United Nations recommended aid target of 0.7 per cent of gross domestic product.

The report also repeated the call for rich countries to lower trade barriers to the developing world. World trade slowed by an unprecedented 14 percentage points in 2001.

Stern also said steps toward trade liberalisation were "not helped by the (US) tariffs on steel. It's a setback, I think we all agree."

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