World Bank warns of recession

Anna Willard, Reuters, Washington

The global economy is slipping toward recession, with growth in trade undergoing one of the most severe decelerations in modern times, the World Bank warned in a report released on Wednesday.

In its annual Global Economic Prospects report, the bank said that while the evidence points to a probable recovery in the middle of next year, the risks the recovery will not happen are the "gravest in a decade."

"As 2001 draws to a close, the global economy is slipping precariously toward recession," the report said.

"The terrorist attacks in the United States, although it is still too early to evaluate them fully, have unleashed new and unpredictable forces that have substantially raised the risk of a global downturn."

For the first time in more than two decades, the world is facing simultaneous downturns in the three major economic engines, the United States, Japan and Europe, the bank said.

Speaking at a news conference to release the report, the bank's chief economist, Nick Stern, said growth around the world this year would post "a very substantial fall from the growth rates of last year."

He said the effects of the Sept. 11 assaults are worse than that of a natural disaster like an earthquake, but that the impact of the anthrax bioterror attacks would likely be small.

In the report, the bank reiterated that it expects the U.S. economy to grow 1.1 percent this year, 1.0 percent next year and recover to post growth of 3.9 percent in 2003.

The forecast depends on a pick up in consumer spending prompted by lower interest rates and fiscal stimulus. But the bank warned that U.S. consumers may be less responsive to recent Federal Reserve interest rate cuts than before.

"U.S. consumers may be less responsive to interest rates than on previous occasions," the report said.

In the 12-nation euro zone, the bank said it expected growth of 1.5 percent this year, dropping slightly to 1.3 percent next year and then climbing to 3.6 percent in 2003.

The bank warned, however, that growth in Europe may level off at a lower than expected plateau.

The bleakest outlook was for Japan. The bank forecast that Japan's economy would contract 0.8 percent this year, expand an anemic 0.1 percent next year and then grow 2.4 percent in 2003.

Again, the bank warned of risks to that outlook, saying Japan's structural reforms could falter and cause the dip in 2001 to carry over into the next year.

The report forecast growth for developing countries of 2.9 percent this year, 3.7 percent next year and 5.2 percent in 2003, if the external environment improves as expected.

The bank said East Asia and the Pacific region would lead developing country growth this year with a 4.6 percent economic expansion, which it saw rising to 4.9 percent next year.

Growth in Latin America was seen expanding only 0.9 percent this year and climbing to 2.5 percent next year.

Dynamism in major economies of the developing world -- particularly China and India and to a lesser extent Brazil and Mexico -- would reinforce a global recovery, the bank said.