Looking Up – The Overhaul It Takes

J.Walker Smith
Yankelovich MONITOR®

Yesterday, the World Bank put an end to many of the hopes centered on the so-called green shoots with its latest forecast of 2009 global GDP. Instead of the 1.7 percent decline forecasted in March, the World Bank now expects a 2.9 percent decline, about 70 percent greater than the March estimate.

The World Bank's new estimate sent stocks and oil prices tumbling. The S&P 500 and the Dow Jones Industrial Index gave up all of their 2009 gains on this news. And crude oil prices dropped $2 per barrel on fears that demand this year would be even lower than anticipated.

This lower forecast is driven largely by concerns that GDP growth in developing countries will be weaker than expected because of lower capital flows. The World Bank expects a drop in private capital flows to developing markets from $1.2 trillion in 2007 to just $363 billion in 2009. In other words, developing markets are unable to get the capital they need to grow because credit markets in developed countries remain weak. Until these markets strengthen, developing countries will be starved of needed investment capital.