OTTAWA, Ont. — The World Bank has raised the spectre of a second recession affecting most of the industrialized world if governments don’t deal successfully with the unfolding European debt crisis.
Although the bank’s baseline forecast calls for global growth over the next three years, it says the outlook could darken if European uncertainty persists, and could even result in a second slump next year.
The risk is serious enough that it will likely be the key topic of discussion for leaders meeting in Toronto later this month at a G20 summit.
Earlier this week, Finance Minister Jim Flaherty agreed that dealing with Europe will be priority No. 1 in Toronto.
The recovery from recession has been intensifying in most regions of the world, with the possible exception of parts of Europe. The World Bank sees a best-case scenario of global growth between 2.9 and 3.3 per cent this year and next, and between 3.2 and 3.5 per cent in 2012.
Canada’s economy experienced its biggest quarterly growth spurt in a decade during the first three months of this year at an annualized rate of 6.1 per cent, and is widely expected to grow at between three and 3.5 per cent for the year as a whole.
But most of those forecasts came before the full severity of the European problems became known.
If the crisis becomes serious enough, it could push advanced economies into a second recession in 2011, the Washington-based financial agency predicts.
“A serious loss of confidence in the debt of the five most heavily indebted European Union countries that led to a freezing-up of credit in those countries could cause GDP growth to slow by as much as 2.4 per cent in 2011 — pushing high-income countries into recession,” it states.
Under that scenario, what the bank refers to as high-income countries could see gross domestic product growth slow to 0.9 per cent this year, and shrink by 0.6 per cent next year — in essence a second, or double-dip, recession.
The report does not give a specific forecast for Canada, but analysts believe the direct impact on Canada would be less than for most other industrialized countries.
“Regardless of how the debt situation in high-income Europe evolves, a second round financial crisis cannot be ruled out in certain countries of developing Europe and Central Asia,” the bank added.
The report comes at a time when most analysts, including official sources like the Bank of Canada and the U.S. Federal Reserve, say downside risks have intensified.
As well, the fiscal austerity measures being announced across Europe — not just in the troubled five of Greece, Italy, Spain, Portugal and Ireland, but also in Germany, the United Kingdom and other more stable economies — will have the effect of slowing growth.
The European mess has been known to markets for weeks, but it remains unclear whether government actions to address the problems will be sufficient, or if more surprises are in store.
Last week, markets received another shock with the news that the U.S. created a paltry 41,000 new private-sector jobs in May. Even Canada’s announcement of 25,000 new jobs was mildly disappointing.
“The markets are speaking with one voice this spring, and the message is mounting concern over the global growth outlook,” economists Douglas Porter and Benjamin Reitzes said in a Bank of Montreal analysis Wednesday.
Brian Bethune, chief Canadian economist for IHS Global Insight, said there’s already signs European woes have washed ashore in Canada in the form of lower profit expectations for corporations, a dip in equity valuations, and lower demand and prices for commodities Canada exports.
The Conference Board of Canada believes profitability will take hit in the second half of the year, noting that the leading indicator that tracks corporate profits fell for the second straight month in May.
“The shock is fairly recent so it’s hard to evaluate the impact (on Canada),” said Bethune.
“But clearly there’s going to be a pretty significant recalibration of corporate profit outlooks for 2011 and corporations will adjust in terms of hiring and spending plans.”
Bank of Canada governor Mark Carney this week said the impact on Europe has been modest, but longer term it will depend “on the ability of central banks and governments to co-operate and act decisively.”
In testimony before Congress on Wednesday, Fed chairman Ben Bernanke expressed confidence that growth will continue.
“It appears ... that the recovery has made an important transition,” Bernanke said. While a “double dip” can’t be ruled out, the most likely course is that the “economy will continue to recover at a moderate pace.”
To avoid a new crisis, the World Bank recommends that indebted countries wind down stimulus and move aggressively to deal with their debt overloads.
“Demand stimulus in high-income countries is increasingly part of the problem instead of the solution,” said the bank’s forecasting group director, Hans Timmer. “A more rapid reining in of spending could reduce borrowing costs and boost growth in both high-income and developing countries in the longer run.”