Tuesday, March 10, 2009

The globe is shrinking, in a bad way

And, please, none of this "growth is bad" nonsense. Shrinking living standards are bad. Especially for people who's living standards are already low.

The World Bank has broken a taboo, becoming the first official organisation to predict the global economy will shrink during 2009, collapsing for the first time in more than 60 years.

A previous forecast from the International Monetary Fund predicted global growth of just 0.5 per cent throughout the year, something it described as a recession but was still positive.

The new World Bank assessment, prepared for next week's meeting of finance ministers and treasurers from the world's 20 largest economies was not specific about the extent of the collapse other than to say that global economic activity should shrink "for the first time since World War Two, with growth at least 5 percentage points below potential".

Global industrial production would be down 15 percent by the middle of this year, with world trade on track to record its largest decline in 80 years...

Of special significance to Australia the Bank said the sharpest falls in trade would occur in East Asia, including in the big Australian customers of Japan and Korea which between them buy one-third of Australian exports.

Deputy Prime Minister Julia Gillard described the findings as "very disturbing" but refused to be drawn on whether the government would need to update its forecast that Australia's unemployment rate would peak at 7 per cent.

Official figures to be released on Thursday are likely to show Australia's unemployment rate hitting 5 per cent for the first time since 2006.

An extra 650,000 jobs were lost in the United States in February taking the US unemployment rate past 8 per cent for the first time in 25 years.

This morning's Dunn and Bradstreet business expectations survey finds that 1 in 4 Australian businesses plan to cut back on staff, with employment expectations the worst in the survey's history.

Treasurer Wayne Swan who will attend the London G20 meeting said the World Bank report pointed underscored the need to put in place a strong economic stimulus program.

An IMF report released on the weekend pressed nations such as Australia to put in place additional stimulus measures saying "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," the report said.

Fund staff found the most effective stimulus programs were those involving government investment. The least effective involved income tax cuts of the kind proposed by Australia's Opposition.

Opposition Leader Malcolm Turnbull continued to propose tax cuts Monday saying that bringing forward the tax cuts already legislated for July this year and July next would be "like a rising tide, lifting all boats".

He also proposed rebating a portion of the superannuation guarantee contribution to small businesses.

The World Bank report warns that the disruptions cause by the economic crisis are all but certain to overwhelm the ability of institutions like it and the International Monetary Fund to protect the economies most at risk.

Robert B. Zoellick, president of the Bank, pleaded for wealthy governments to create a ``vulnerability fund'' and to set aside a fraction of what they spend on stimulating their own economies to help others.

``This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis,'' he said.

``We need investments in safety nets, infrastructure, and small and medium-size companies to create jobs and to avoid social and political unrest."