World Bank expects economy to shrink 1.7%

Amid a continuing global free fall, the World Bank Monday sharply lowered its 2009 economic forecast. The bank now expects the world economy to shrink by 1.7% this year, the first such contraction since the end of World War II and a much more dramatic decline than expected just three months ago.

"Since then, the global economy has deteriorated very rapidly," said Justin Lin, the bank's chief economist.

The past five months, global industrial production has dropped 15% — an unprecedented drop for such a short period, said Hans Timmer, manager for global trends in the bank's development prospects group. "That is really, really extraordinary ... (and) a sign that the global economy has become very, very integrated," Timmer said.

Coming just days before the April 2 G-20 financial summit in London, the gloomy forecast highlights the steep task facing world leaders.

World Bank President Robert Zoellick, meanwhile, is scheduled to give a speech today in London calling for the G-20 to back a new $50 billion program to ease bottlenecks in routine trade financing. "This is not a moment for complacency. ... The one certitude we can draw from events over the past year is our inability to predict what is to come, and how it may trigger other unexpected events," Zoellick will say, according to an advance speech text.

The World Bank still sees a global recovery next year. But it says the rebound will be weaker than the customary post-recession bounce and will be shadowed by rising unemployment until 2011.

Some private economists are even more downbeat. Uri Dadush, a former senior bank economist, says the world could even tumble into a depression. Economists have no standard definition for a depression, but some use it to describe a multiyear downturn involving double-digit unemployment and at least a 10% decline in annual output.

"The possibility of a depression is serious. Not a Great Depression, but a depression," says Dadush, now director of international economics for the Carnegie Endowment for International Peace.

One big worry: Developing countries in Eastern Europe, Latin America and Africa will need $270 billion to $700 billion to cover their debt repayment and import bills. With private capital flows drying up, that shortfall could require further painful economic belt-tightening in scores of countries — unless international organizations help.

This week's summit is expected to provide sizable new funds to the International Monetary Fund, which already has steered bailouts to countries such as Pakistan and Ukraine.