World Bank Says Recovery Underway

The World Bank believes that the Chinese growth story is key to boosting global growth trends, particularly in East Asian economies, as industrial growth in the country will drive global investment emanating from China.

"...world industrial produc tion was falling at a 27 percent annualized pace, but by the beginning of April/May, production began recovering (figure 1.5), initially led by ac celerating growth in China following the imple mentation of the $575 billion (over five quarters) fiscal stimulus package. Increased import demand from China quickly spread to other countries, with industrial production registering positive growth in emerging countries (excluding China) by March 2009 and high-income countries by May 2009."

However, it also warns of the higher risk of asset bubbles and overheating in Asian economies.

"The acute phase of the financial crisis has passed and a global economic recovery is under way. Moreover, the recovery is fragile and expected to slow in the second half of 2010 as the growth impact of fiscal and monetary measures wane and the current inventory cycle runs its course. Indeed, industrial production growth is already slowing (albeit from very high rates). As a result, employment growth will remain weak and unemployment is expected to remain high for many years. The overall strength of the recovery and its du rability will depend on the extent to which household- and business-sector demand strengthens over the next few quarters. While the baseline scenario projects that global growth will firm to 2.7 percent in 2010 and 3.2 percent in 2011 after a 2.2 percent de cline in 2009, neither a double-dip scenario, where growth slows appreciably in 2011, or a strengthening recovery can be ruled out."

"...the economic rebound that is currently under way is likely to continue for several months, supporting relatively rapid growth. However, a great deal of uncertainty clouds the outlook for the second half of 2010 and beyond. The waning growth impact of the fiscal stimulus, a progressive end to the inventory cycle, uncertainty about the extent to which private sector confidence will step in and sustain the recovery, and the possibility of a second round of bank failures either in developed or developing countries are among the factors that could contribute to a more pronounced slowdown of growth in the second half of 2010 and into 2011-potentially yielding a double-dip growth recession.

On the upside, if private sector confidence does return, there is a risk that the huge tra ditional and nontraditional monetary stimu lus that has been put into place will begin to gain traction, potentially reflating some of the bubbles that have only recently burst. Indeed, some (Roubini 2009) are already arguing that very loose monetary policy in high-income countries has produced a carry-trade oppor­tunity that is underpinning in an unsustain able manner the resurgence of capital flows to developing countries that may ultimately regenerate the kind of global imbalances that precipitated the crisis in the first place."