Thursday, January 19, 2012

World Bank: We're on the edge of a new GFC

Australian authorities are taking seriously a World Bank warning of new financial crisis so severe it would eclipse the chaos that followed the collapse of Lehman Brothers in 2008.

World Bank lead economist Andrew Burns yesterday called on vulnerable nations to prepare for the worst and refinance loans now rather than waiting until funds dry up.

“If there are countries that have important amounts of financing coming due in the months and years ahead maybe now is the time to prefinance that debt, prepare the loans and get that money while financial markets are still relatively active,” he told reporters unveiling the Bank’s latest six-monthly assessment of global prospects in Beijing.

The World Bank has halved its previous 2012 forecast for economic growth in high-income countries and is forecasting negative growth for the collection of nations that use the euro as their currency.

It’s concern is that financial markets could stop working if lenders refuse to roll over European debts.

“A much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic cannot be ruled out,” the report says. “Should this happen the ensuing global downturn is likely to be deeper and longer-lasting than the recession of 2008/2009.”

“Countries do not have the fiscal and monetary space to stimulate the global economy or support the financial system to the same degree as they did in 2008/09... While developing countries are in better shape than high-income countries, they too have fewer resources available. No country and no region will escape.”

Australia, not specifically mentioned in the report, has a relatively good budget position and a better ability than most to ward off a downturn by interest rate cuts and increased government spending as it did in 2008.

But the Bank says commodity-exporting nations such as Australia will find their budgets hit by much lower prices.

Its central forecast is for oil prices to fall 5.5 per cent this year and non-oil commodity prices to slide 9 per cent. It has modelled worse scenarios - one for a 20 per cent slide in oil prices and a bigger slide in minerals and energy prices.

Each of its scenarios is worse than envisioned in the government’s December budget update, calling into question the government’s forecast of a 2012/13 budget surplus.

Acting Treasurer Bill Shorten said the budget would “obviously be hit”.

“The past year was difficult and disappointing for the global economy. The outlook for 2012 looks even more challenging,” he said responding to the World Bank report.

“But the Australian economy is now around 7 per cent larger than it was prior to the global financial crisis. By way of comparison, the United States is just back to – or above – where it was. We have a proven track record having fought off the global recession and the worst the world can throw at us.”

The Bank is forecasting worldwide economic growth of just 2.5 per cent this year, down from its previous forecast of 3.6 per cent. Anything less than 3 per cent is commonly defined as a global recession.

World trade would grow by only 4.7 per cent, down from 6.6 per cent in 2011.

China would continue to grow strongly, but by 8.4 per cent, down from 9.1 per cent. High income nations would grow by just 1.4 per cent half the previously forecast 2.7 per cent.

A separate Westpac consumer survey released yesterday found confidence still weaker than it was before the November and December rate cuts despite a slight uptick in January. Four in every ten consumers surveyed believed their family finance had worsened over the past year. Only two in every ten believed they had improved.

Specialty Fashion Group, which runs the women’s chains Katies, La Senza and Millers, reported worse than expected December half sales and said if current conditions continued it would have to close 120 of its stores over three years.

Published in today's SMH and Age

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