World Bank Issues The World A Rare Reality Check

The World Bank recently released it's "Global Economic Prospects" report for 2012. Organizations such as the World Bank tend to do their fair share of sugar-coating issues, however, their most recent report is about as blunt as you are likely to see from them in regards to the economic outlook.

"The world economy has entered a very difficult phase characterized by significant downside risks and fragility."

".....as a result forecasts have been significantly downgraded."

"However, even achieving these much weaker outturns is very uncertain."

"While contained for the moment, the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains. In particular, the willingness of markets to finance the deficits and maturing debt of high-income countries cannot be assured. Should more countries find themselves denied such financing, a much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic cannot be ruled out. The world could be thrown into a recession as large or even larger than that of 2008/09."

Oh and for all those who are still deluding themselves into believing the idea that Europe will avoid a recession in 2012. According to the World Bank "Europe appears to have entered recession" which they estimate to have begun in the 4th Quarter of last year. Again this should not be a surprise to anybody, but for some reason people deny it until organizations such as these put their official stamp of approval on it (and there will probably still be deniers all the way up until each individual country makes it official.....big delay).

Here is a chart of the World Bank's estimates for GDP growth using 3 different scenarios they presented

According to the world bank regarding the baseline forecast...

"The baseline projections.....assume that efforts to-date and those that follow prevent the sovereign-debt stress of the past months from deteriorating further, but fail to completely eradicate market concerns."

I think their baseline assumptions are pretty optimistic. And regarding the contained crisis scenario...

"it is assumed that one or two small Euro Area economies (equal to about 4 percent of Area GDP) face a serious credit squeeze.

"It is assumed in this scenario that although borrowing costs in other European economies rise and banks tighten lending conditions due to losses in the directly affected economies, adequate steps are taken in response to the crisis to ensure that banking-sector stress in Europe is contained and does not spread to the rest of the high income world."

And finally regarding the larger crisis scenario....

"the freezing up of credit is assumed to spread to two larger Euro Area economies (equal to around 30 percent of Euro Area GDP)."

"Repercussions to the Euro Area, global financial systems and precautionary savings are much larger because the shock is 6 times larger"

In their conclusion:

The global economy is at a very difficult juncture. The financial system of the largest economic bloc in the world is threatened by a fiscal and financial crisis that has so far eluded policymakers’ efforts to contain it. Outside of Europe, high-income country growth, though strengthening, remains weak in historical perspective. At the same time some of the largest and most dynamic developing countries have entered a slowing phase.

These are not auspicious circumstances, and despite the significant measures that have been taken, the possibility of a further escalation of the crisis in Europe cannot be ruled out. Should this happen, the ensuing global downturn is likely to be deeper and longer-lasting than the recession of 2008/2009 because countries do not have the fiscal and monetary space to stimulate the global economy or support the financial system to the same degree as they did in 2008/09. While developing countries are in better shape than high-income countries, they too have fewer resources available (especially if international capital is not available to support deficit spending). No country and no region will escape the consequences of a serious downturn.

I'll leave you with random charts I found interesting from the report

Yes that is China growing from using 5% of the world's metal consumption to about 41% currently....now how much of that consumption is productive vs wasted building ghost cities, is another question.