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Global recovery faces ’serious hurdles’ next year – World Bank

The global economy faces serious hurdles next year including “large-scale” unemployment in rich nations, asset bubbles, and backsliding towards protectionism, the World Bank chief said on Friday.

In a sobering assessment of the fragile status of the economic recovery, Robert Zoellick outlined a list of potential pitfalls to a business forum on the sidelines of an Asia-Pacific summit.

“The reason I am flagging this issue is that we are in the stage of recovery where confidence is very important,” he said. “If you have asset bubbles that are not properly dealt with, you could again undermine confidence in 2010, which is the year I am more concerned about.”

Zoellick said that continuing high levels of unemployment, particularly in developed nations, would create “second-wave” effects for banks including defaults on consumer loans, credit cards and mortgages. The US consumer, who has been the saviour in previous downturns, can no longer be relied upon to drag the global economy out of the doldrums by returning to enthusiastic spending, he said.

“In this environment the US consumer is deleveraging, building savings. He or she is not going to play the role that they played in the past,” he said, adding that the onus was now on the developing world. Countries like Indonesia, the Philippines and Thailand were now able to “actually borrow more if they have access to financing”, he said.

Zoellick also warned of signs that crisis-hit countries are attempting to shore up their economies by reintroducing protectionist measures. “By and large it’s a low grade fever, it’s not a full influenza, but if you’ve got large-scale unemployment one has to be careful, because political leaders are going to be under pressure to do something and unfortunately one of the things they often are tempted to do is to raise barriers.”

Ministers from the 21-member Asia Pacific Economic Cooperation (APEC) forum meeting in Singapore this week ahead of a weekend summit have issued calls to resist protectionism, saying it risks reversing the region’s nascent recovery. They have also called for massive government stimulus packages to be unwound carefully, and not withdrawn before private sector demand is strong enough to drive economic engines.

“If you look at the US stimulus programme and many of the stimulus packages, a lot of the money actually comes late in 2009, the start of 2010,” Zoellick said. “The question mark for everybody is whether the private sector will kick in by the middle of 2010 and that’s part of an issue of confidence.”

The World Bank chief said that another little-mentioned risk was the spectre of inflation in the Asia-Pacific region after central banks moved to “open the tap of liquidity” in the face of the crisis. “This will be a challenge for the central banks in this region because traditionally their monetary policy has followed the Federal Reserve,” he said. Zoellick said that if central banks follow the Fed and keep rates low they risk triggering inflation, but if they opt for rate hikes their currencies will appreciate and make their crucial export sectors less competitive.

via Global recovery faces ’serious hurdles’ next year.

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