A real party-killer

A new gloomy World Bank economic forecast triggered massive selling in world stock markets Monday, even as some economists suggested it may all have been a misunderstanding.

OTTAWA — A new gloomy World Bank economic forecast triggered massive selling in world stock markets Monday, even as some economists suggested it may all have been a misunderstanding.

The report, released Sunday, casts a dark cloud over expectations that the recovery may be just around the corner by predicting a global contraction of 2.9 per cent this year instead of the 1.7 per cent previously predicted and a more muted bounce-back next year.

Global markets retreated on the news, the Dow Jones in New York lost 200 points, world oil dropped almost three dollars.

In Canada, the Toronto stock exchange collapsed by more than 450 points.

“Definitely there seems to be some serious reassessment among investors. But I hope it’s not the World Bank report that’s doing this,” said Douglas Porter, deputy chief economist with BMO Capital Markets.

He said looking behind the headline of the report shows that it is very similar to other recent forecasts, saying it comes out looking more negative only because the World Bank gives less weighting to emerging economies like China.

TD Bank economist Richard Kelly said the World Bank is now mainly in line with the wide consensus, including the International Monetary Fund and the TD Bank, both in what will happen this year and next.

The World Bank gives higher weight in calculating global gross domestic product to industrial countries like the U.S. and Canada, which have shrinking economies, and less weight to countries like China, which did not pull back as much and are expected to bounce back stronger.

In fact, says Kelly, the World Bank gives a second, comparable set of data using the same methodology as most other economic forecasters and that comes out almost identical to the consensus — global contraction of 1.7 per cent this year and growth of 2.8 per cent next year.

In April, the IMF forecast a 1.3 per cent retreat this year, slightly lower than the World Bank, but its 1.9 per cent growth projection for 2010 is well below that of the World Bank that so spooked markets.

“Indeed, we see very little difference between the World Bank’s new forecasts and our own,” said Kelly.

“The global economy will continue to see a tough slog, but we would focus less on 2009 growth statistics which are pulled down by the past and more on the future, which continues to point to recovery.”

Finance Minister Jim Flaherty also expressed confidence that the Canadian economy is on the mend.

“All of us recognize we are not out of the woods in this recession,” he said Monday, but added that the consensus is that positive growth will return at the end of this year and next.

Still, the mood of enthusiasm that has characterized economic thinking in the past month or so appears to be dissipating and being replaced by the sobering realization that although the world economy — as well as Canada’s — is no longer in free-fall, it is also not growing yet.

Last week, Bank of Canada governor Mark Carney warned that recovery was not a foregone conclusion and that private sector consumption is not strong enough to carry the load alone, saying government stimulus is still needed.

Porter said beside the new report, investors may also be making the judgment that the encouraging signals of the past month or so — while welcome — do not justify a 40 per cent run-up in stock prices since early March.

The World Bank is on the same page as most forecasters in saying that the expected recovery is projected to be much less vigorous than normal because banks’ ability to finance investment and consumer spending will be hampered by the overhang of unpaid loans and devalued assets.

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