Ending stimulus plans is premature, says World Bank

World Bank Chief Economist Justin Lin said in an interview he was concerned about rising borrowing costs due to growing sovereign debt offerings and a weak external financing conditions for the emerging economies of Europe and Central Asia.

The bank warned in a report on Monday that prospects for the world economy were “unusually uncertain” and cut its growth forecasts for most countries.

“If on the financial side you have a recovery and on the real side you also show improvement, then we will be confident that we are going to have a sustained recovery,” Lin told Reuters on the sidelines of an international conference.

“It is very important to let the stimulus continue until the capacity utilization returns to a normal level. Otherwise, there is always a danger that unemployment will rise and growth slow down.”

Because global growth will only return to its full potential by 2011, the gap between actual and potential output, unemployment, and disinflationary pressures continue to build, said the World Bank in its Global Development Finance 2009 report.

The report compares with a more upbeat assessment by the International Monetary Fund, which said last week that the decline in global output has moderated and that it may raise its 2010 growth forecast for the world economy.

The World Bank expects the United States and Japan — the world's top economies — to contract by 3.0 percent and 6.8 percent this year, respectively, worse than the 2.4 percent and 5.3 percent declines predicted three months ago.

The World Bank recently cut its forecast for the world economy to a contraction of 2.9 percent from 1.7 percent but has not released individual country forecasts.

Lin said the soaring amount of sovereign debt offerings in the United States and elsewhere to fund stimulus packages would inevitably raise borrowing costs and could hamper a recovery.

“If the bonds increase in quantity, certainly there will be pressure on the price and interest rates are likely to increase,” he said.

“That will increase the cost of capital, increase the cost of management. That why we say there's some uncertainty.”

He said some of the emerging markets in Europe and Central Asian could face financial crises should the global recovery be delayed and financing troubles worsen.

“There certainly is a concern that they may have a second round of crisis because of the financing gap and also if the global economy doesn't recover, and their exports and remittances can't recover. He identify any countries that may face such a scenario.

The World Bank warned in its report that if financial troubles persist in these economies, some may be forced to devalue their currencies to restore internal and external balances.

Lin declined to be drawn on whether a doubling in oil prices in recent months would prompt the World Bank to revise its forecast for a 10 percent rise in the crude oil prices throughout next year.

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