The world economy will shrink this year for the first time since the Second World War, warns the gloomiest forecast yet delivered by a major international institutional.
The Institute of International Finance, the global organisation of major banks, predicted an almost unprecedented collapse in world economic growth and capital flows.
It became the first major global institution to forecast a full-scale global contraction in 2009, predicting that the economy would shrink by 1.1pc.
IIF chief economist Philip Suttle said: “This is the worst period since the interwar years. The global growth backdrop is very difficult. We foresee a contraction in 2009 in the global economy of over 1pc.”
He also expects rich economies to contract by 2.1pc – the worst peacetime output since the 1930s.
Private flows of capital into the emerging world are set nearly to dry up in the next year, the IIF predicted, dropping from $928.6bn in 2007 down to $465.8bn in 2008 and then to $165.3bn the following year.
As a result the current account deficits in emerging Europe will more than treble in the coming year, from $30bn in 2008 to $117bn next year.
The forecasts shed light on the likelihood that the current financial crisis transmutes into a severe worldwide recession of the kind that has not been seen since the Second World War. Asia is likely to suffer a worse downturn than during the Asian financial crisis, the report indicated.
The IIF was meeting ahead of the World Economic Forum in Davos, and Mr Rhodes warned that the growing concern this year was the rise in protectionism. He said: “There is a tremendous need to keep trade lines open. If you start seeing – with everything else we’re talking about – the reduction of trade lines on top of that, then you really have a problem.
“I’m hopeful that at the Group of 20 meetings [this March in London] participants will understand that we must keep trade flowing; that it’s key to growth going forward. But the risk remains that we will return to beggar-thy-neighbour policies – and the last thing we need is to break the world apart in that way.”
By Edmund Conway in Davos
Last Updated: 12:00PM GMT 28 Jan 2009
Source: The Telegraph