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A Painful Recovery

Hans Timmer's picture

The tone of the World Bank’s newly published Global Economic Prospects 2010 is somber, with a lot of concern about vulnerabilities and unsolved problems. That might be surprising, because the report also predicts a widespread, global recovery (global growth of 2.7 percent this year and 3.2 percent next year) after the disastrous 2.2 percent contraction of global output in 2009. Is there no reason to celebrate?

The rationale behind our somber assessment is well illustrated by two numbers: 50 million and 64 million. The report notes that in 2009 around 50 million more people remained in extreme poverty because of the crisis and it predicts that in 2010 this number will rise to 64 million. The point is not just that the crisis prevented millions of people from escaping extreme poverty. The point is also that 64 million is higher than 50 million! Despite the recovery this year, the impact of the crisis on poverty will be larger than in 2009. On top of the income losses in 2009, income growth in 2010 will still fall short of what it would have been without a crisis.

Similar effects, albeit of a somewhat different nature, are described in other parts of the analysis. Despite the recovery, unemployment will likely further increase in many countries and the utilization rate of global production capacity is forecast to decline further (see graph). The reason is that growth in 2010 will not even reach trend growth. Growth will not be strong enough to provide jobs for all newcomers to the global labor market in 2010, leave alone provide new employment for those who lost their jobs in 2009. There are many more examples of ways in which the crisis will leave its marks in years to come. To name a few: fiscal deficits are likely to deteriorate further, school completion rates will be lower for several years, and stagnant investments will result in lower labor productivity in the coming years.

 

Source: World Bank, Global Economic Prospects 2010: Crisis, Finance, and Growth

The key problem is that the recovery nowhere near strong enough to undo the damage that was done in 2009. The report argues that bank lending will remain too subdued for a powerful recovery and that two of the early drivers of the recovery (the inventory cycle and macroeconomic demand stimulus) will run out of steam soon. In my next post I will come back to the limitations of demand stimulus.

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Submitted by Anonymous on
EmergingFrontierMarkets.com | As world economy slowly recovers... | New link posted on Fri, 22 Jan 2010: [...] The latest GEP estimates that about 64 million more people may be living in extreme poverty by the end of 2010 due to the crisis [...]

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