Accessibility links

Group Predicts Big Slowdown in World Economic Growth

The Institute of International Finance, an association of the world's biggest banks, said Tuesday that the deepening world recession is likely to result in the global economy contracting by more than one percent in 2009.

Long-serving Citibank Vice President William Rhodes said this is the deepest global recession since World War II.

The institute, of which Rhodes is also the vice-chairman, predicts a shrinking of 1.1 percent this year. That is a sharp reduction from the two percent growth of 2008, and the 3.5 percent advance in 2007.

Economists often say that since global growth includes fast growing developing economies as well as richer mature economies, overall growth of less than three percent is equivalent to a recession. Phil Suttle is the institute's chief economist and principal author of the forecast. "The global growth backdrop that we are looking at for the next 12 to 18 months is a very, very difficult one," he said.

Only a month ago, Suttle and his team were predicting a more modest 2009 shrinkage of less than one-half of one percent. The institute said that the three biggest economies, the United States, the 15-nation euro zone, and Japan, will collectively shrink by 2.1 percent this year, nearly twice the decline predicted only one month ago.

China, in recent years the world's fastest growing economy, is projected to see its growth decelerate to a much subdued pace of 6.5 percent.

Suttle said the most vulnerable region is emerging Europe, Russia and the post-communist economies of eastern Europe. Of these, Suttle said he worries most about Ukraine, whose economy is expected to contract by 12 percent this year.

"Ukraine is in severe difficulty. We know that. It is visible almost every day on the news from its dispute with Gazprom [the Russian energy company]. But its economy is reeling and its financial sector is in deep difficulty. The IMF program is in place, but we're not sure it is going to work," he said.

The International Monetary Fund recently committed over $16 billion to Ukraine.

The institute said because of the 17-month old financial crisis and sharp contraction of bank lending, capital flows to developing countries will slow to $165 billion this year. That is down from $466 billion in 2008 and $929 billion in 2007. Developing countries rely on foreign investment and official flows from governments for investment and job creation.

The credit squeeze that began in the United States in 2007 has evolved the financial crisis of 2008 and now the economic crisis of 2009.