The world’s major financial institutions become more pessimistic each time they report on the economic outlook. 6 weeks ago, the blog noted that the IMF expected “the global economy to come to a virtual standstill in 2009″.
Today, the World Bank is forecasting that “the global economy is likely to shrink this year for the first time since World War 2″. Equally worrying is its forecast that “world trade is on track in 2009 to record its largest decline in 80 years, with the sharpest losses in East Asia”.
Yet many policy-makers still seem to underestimate the problems. As Nobel Prize-winning economist Paul Krugman wrote last week, “the reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.”
Several European policymakers also seem stuck in denial mode. In January, for example, the IMF warned of “deflation risk” if the current policy approach failed. Yet Sunday’s central bank meeting didn’t even discuss the issue. European Central Bank President, Claude Trichet, said “It’s not something we consider a high probability at all at a global level.”
As economic risks rise, the blog hopes policymakers will quickly turn their attention to contingency planning, in case their expectations for a V-shaped recovery prove illusory.