World Bank Forecast of Negative 2.9% Global GDP Way too Positive

Posted by Michael A. Kamperman on June 22, 2009

The World Bank released a revised forecast of global economic activity and is now forecasting a 2.9 percent contraction in gross domestic product for this year, as opposed to the 1.7 percent decline it projected in March.  But this is going to be way too positive.  Lost in the World Bank headlines is this little tidbit, the negative 2.9% forecasted economic contraction assumes the global economy returns to positive growth in the second half of 2009.  Is this assumption based on some theory about reversion to the mean?  Is it based on a concept that economic growth is a natural condition and will therefore naturally return at some point?  The World Bank does not explain why it expects the world to return to economic growth in the second half of the year.  Perhaps it is based on optimism and a belief that the green shoots are real. 

The New York Times reported today that “the chief economist of the International Monetary Fund, Olivier Blanchard, said Monday that the U.S. economy would see a sustainable recovery only if exports rose substantially, and that this might require an adjustment in the dollar’s exchange rate.”  In the post World War II era the U.S. has competed on technological breakthroughs.  The World is not prepared for the U.S. to compete on cost.  The dollar would have to drop dramatically for the U.S. to be able compete with the rest of the world based purely on cost.  If the dollar dropped that far it would end the U.S. role as the source of final demand in the world.  That would lead to a further economic downturn in exporting nations like China, Germany, and Japan just when they would face for the first time cost competition for their own exports from the U.S.  The U.S. cannot export its way out of the economic crisis.  The world cannot depend on vigorous U.S. exports as the solution to global economic downturn.

The credit markets, the source of the recent global economic collapse, have not been fixed.  The only way for global growth to resume is for the credit markets to be fixed.  In the second half of 2009 the global economies will have much higher rates of unemployment than they had in the first half of the year.  Additionally, the credit worthiness of most borrowers will be impaired further.  The only thing that will restore global economic growth in the next few years is to fix the broken credit markets.  Part of the solution to fixing the broken credit markets is for the Fed to significantly up its program of quantitative easing.  There is not enough money in the bond market and the only way to increase the real supply of money is for the Fed to start printing a lot more money and purchase a lot more U.S. Treasury bonds.