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World Bank Head Predicts No “Double-Dip” Recession
World Bank President Robert Zoellick believes the world will not slide into a double-dip recession. Zoellick was in Singapore, attending an economic conference amid plummeting world stock prices and worries over a slowdown in U.S. economic growth. Zoellick believes the United States and the world will avoid a “double-dip” recession, but admitted that growth is likely to remain sluggish and prospects are uncertain. Zoellick said the world is entering a “dangerous period,” noting that the United States could reassure markets with steps to put the brakes on increasing its debt, rather than making deep cuts in spending.
Zoellick’s comments add pressure on European officials who are trying to contain a sovereign debt crisis that threatens Italy, whose government bonds in euros have declined a record 11 consecutive days. Finland has fostered division among policy makers by looking for collateral for loans to Greece, the first of the three euro-region nations to receive bailouts so far. American and European economies are stalling and feeble global growth are impacting Asia, Singapore’s Minister of Finance Tharman Shanmugaratnam said. Growth in the U.S. and Europe may be just one percent.
“We’re already at stall speed in the U.S. and Europe, which means we’re now more likely than not to see a recession,” Shanmugaratnam said. Companies are holding back spending and consumers globally lack confidence. Zoellick tamped down the likelihood of a “double-dip” global recession in comments to reporters in Singapore today. Still, “we are now seeing a particularly sensitive time in the euro zone,” the World Bank chief said. “A number of issues are converging.”
“These things are very hard to predict because if you have events trigger uncertainty in Europe, that will flow back to the U.S.,” Zoellick said. The eurozone’s performance “depends on the political decisions moving forward,” he said. The euro will survive in the next five years, although the question over membership of the common currency is one that Europeans must answer. “Sometimes people hope that you can muddle through by providing financing and liquidity, in the case of Europe, from the European Financial Stability Facility or the European Central Bank,” Zoellick said. “They now recognize that’s not going to happen and instead what you see is with some of the weaker economies, that the austerity policies are pushing them into slower and slower growth and so this could be a downward spiral.”
According to Zoellick, recent European Central Bank government bond purchases have given temporary monetary liquidity to markets. “The policies that have been pursued by the EU up to now can buy time, but parliaments and the public have to come to terms with fundamental questions,” Zoellick said. One direction is to deepen the fiscal union.”
“They’ve tried to pump money into it, they’ve tried in the past month. The ECB bought a lot of bonds. But, I think dealing with these problems through liquidity measures will not be sufficient,” Zoellick said. “Christine Lagarde of the International Monetary Fund (IMF) and I from a different position at the World Bank have been trying to prod people to recognize some of these questions.” Lagarde, who told the Federal Reserve’s annual conference that European banks need urgent capitalization, angered some European policymakers and politicians with her opinions.
“People should not underestimate the European response, but Europeans should not be fooled that that type of response will deal with the fundamental questions that still need to be addressed,” Zoellick said. The markets have been hoping for additional monetary stimulus from the Federal Reserve to relieve global growth concerns, but Zoellick said that monetary policy alone won’t do the job. Rather, he said, the real solution to Europe’s crisis must be found to deal with the crisis. “This one is really even beyond the finance ministers’ pay grade. These are going to be the decisions that have to be made by the heads of government and supported by their parliaments,” he said.
American markets analyst Peter Kenny of Knight Capital said “We have a eurozone that is an apoplectic frenzy of just trying to right the ship. If you can find some stabilizing influence in the eurozone to give the global markets some confidence, I’d be shocked.” Parliaments in Germany and France currently debating the extent of their countries’ contribution to the European Financial Stability Facility, the fund set up to bail out any eurozone nations struggling with their debt obligations.
Richard Jeffrey, chief investment officer at Cazenove Capital Management, said that “Money that the key worry for the markets was the health of the world economy. “If the world economy is slowing down or perhaps even moving into recession – I think that is less likely, but that is what people fear – then that has negative implications for the financial system and the banking sector. The debt problems in the peripheral European economies rumble on, of course, but again their debt problems are helped if there is growth. If there isn’t growth in the economies, then their debt problems become more difficult to support, so this is all interlinked.”