World Bank Forecasts Contraction

The World Bank has predicted that the world economy will contract by 2.9% this year. Although we suspect the Bank is being overly optimistic, it is good that some institution of repute, such as the World Bank, is talking about the ongoing contraction of the world's economy. People of the world need to get message that times, they are a'changing.

The 2.9%, as we mentioned, is ridiculously low. To back up our assertion, we present an interesting tidbit buried in the Bank's release: the stunning collapse in private capital investment. According to the Bank's press release, private capital has dropped "from $707 billion in 2008 to an anticipated $363 billion in 2009." That is, a drop of over 51%.

Our observation is this: if indeed private investment has dropped by 51% worldwide, we have serious doubts that the world economy is going to drop by only 2.9% this year. In fact, we suspect that the actual drop will be closer to 29% than 2.9%. Although investment drops faster than an economy - as there is legacy capital economies can burn through - the collapse of new capital will make itself felt.

One could argue that world Governments will move to pick up the slack, as it were, but we think not. Governments are not nimble; they cannot react as quickly to economic conditions as can private investors. At the end of the day, more investors will have jumped ship - taking their money with them - than Governments can replace with fresh capital. The end result will be a much greater economic contraction... we expect it will be both shocking and demoralising to many in the world who pinned their hopes on the fabled "green shoots."