Global Economy to Shrink First Time Since WWII, World Bank Says

By Christopher Swann

March 8 (Bloomberg) -- The global economy is likely to shrink for the first time since World War II, and trade will decline by the most in 80 years, the World Bank said today.

The World Bank’s assessment is more pessimistic than an International Monetary Fund report in January predicting 0.5 percent global growth this year. The Washington-based World Bank didn’t provide a specific estimate in its report.

World growth will be 5 percent below its potential, the bank said. Developing nations will bear the brunt of the contraction. They will face a shortfall of between $270 billion and $700 billion to pay for imports and service debts, the bank said.

“We need to react in real time to a growing crisis that is hurting people in developing countries,” said World Bank President Robert Zoellick in a statement. Action is needed by governments and multilateral lenders “to avoid social and political unrest.”

East Asia will be hit the hardest by the decline in global commerce, the bank said. Global industrial production is expected to be as much as 15 percent lower than in 2008.

The World Bank said that a surge of debt issuance by rich nations risks “crowding out many developing country borrowers, both private and public.” Emerging nations that can access capital markets will be forced to pay higher rates of interest.

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.

Justin Lin, the bank’s chief economist, said that developed nations should funnel part of their stimulus spending to poorer countries where it would be more effective at boosting demand. Channeling infrastructure investment to the developing world can have a “bigger bang for the buck,” he said.