World Bank Downgrades Global Growth Outlook

On Wednesday, the World Bank revised its global growth projections to reflect the deteriorating debt situation in Europe. Comprised of over 180 member countries, the World Bank predicted last June that global activity for 2012 would expand by 3.1 percent. The downgraded outlook now places global growth for 2012 at just 2.5 percent, with most of the growth slated for the emerging economies.

In fact, noted World Bank economist Justin Lin, Europe was likely already in recession and could trigger a return to the turmoil that led to the recession of 2009.

“The risk of a global freezing-up of the markets and as well as a global crisis similar to what happened in September 2008 are real,” Lin told reporters in Beijing.

The Bank of Canada agreed with the World Bank’s assessment of the situation in Europe saying on Wednesday that Europe will likely be in recession for most of 2012. The Bank also said it expected the impact will cost the Canadian economy about $10 billion due not only to lost export sales, but also a general decline in world-wide investor confidence and the impact this will have on global markets.

In November, the Federal Reserve likewise revised downwards its outlook for 2012. The Fed predicted that growth would expand by only 2.5 to 2.9 percent compared to its earlier view of between 3.3 and 3.7 percent. News of a more positive nature came in the form the Fed’s “Beige Book” which showed that for seven of the twelve regions surveyed, the last quarter of 2011 ended on a more upbeat note compared to the year before.

Despite the year-over-year gains, the recovery is still being held in check by two significant forces; a still-depressed housing market and stubbornly-elevated unemployment rate.

The longer-term view provides little optimism for a quick fix for either predicament. As a result, the Fed remains committed to its low-interest rate policy that will see the Federal Funds rate capped at 0.25 percent until mid-way through 2013.

Greece Close to Deal with Creditors

One hopeful sign from Europe is the latest news suggesting that Greece could be close to inking a deal with its major bond holders. Late last year, a committee made up of thirty-two of Greece’s private creditors was formed to lead the negotiations to set the guidelines for addressing about 200 billion euros ($254.6 billion) in debt due to mature in the first half of 2012.

An agreement reached Oct. 26th of last year called for these soon-to-expire bonds to be swapped for new bonds with a significantly discounted face value expected to be about half of the original par value. Discussions are now said to be centered on the interest rate these new bonds will pay; insiders expect the annual interest rate will be between 4 and 5 percent with 20 to 30 year maturity dates.

Foreign currency markets reacted positively to the news of a potential agreement with the euro gaining half a percent on the dollar yesterday. The euro gained another 0.9 percent by early afternoon in New York rising to a 12-day high of $1.2853.

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