World Economic Forum warns government bailouts could backfire

Agence France-Presse

Posted at Jan 13 2009 05:12 PM | Updated as of Jan 14 2009 01:50 AM

GENEVA - The World Economic Forum took a grim view of prospects for the world economy this year in a report released Tuesday, warning that government spending to counter the financial crisis could backfire.

The annual report on global risks, which this year focuses on the implications of the crisis that has hit banking and finance, concluded that "the economic outlook for 2009 is a grim one for most economies."

The business leaders, experts and financial services firms that took part in the report pointed to ongoing volatility in markets, a liquidity shortage, rising unemployment and record lows in business and consumer confidence.

But the crux of the report was a prediction that "massive" government spending to support ailing financial institutions hit by the credit crisis could sow the seeds of more problems in the future.

Although it has been widely advocated, such spending is set to fuel big deficits in several major economies including Australia, Britain, France and the United States, WEF's "Global Risks 2009" report said.

"One of the biggest risks is that short-term crisis fighting may induce businesses and governments to lose the long term perspective on risk," said one of the contributors, Daniel Hofmann, chief economist for insurer Zurich Financial Services.

The report also sounded a warning about the consequences of a theoretical "hard landing" for the Chinese economy, despite more positive forecasts from institutions such as the World Bank.

Given China's growing a importance as a motor of world growth and its position as a "massive" net creditor for the United States, a growth rate of six percent or less could have a "significant" impact on a weakened global economy, it added.

The World Bank has warned that China's economy will expand by just 7.5 percent in 2009, the lowest level since 1990.

The WEF report also explored the interlinkages that increased risks to the economy. Deficits, particularly the US one, would also be influenced by the performance of China's economy.

The latter would have an impact on the dollar and also increase the volatility of energy and food prices.

Meanwhile, equity markets and prices were trapped in "a vicious circle" between declining asset values, and writedowns while markets were flooded with more assets than they could absorb because of equity selling, the WEF said.

The Global Risks report will provide an input to the WEF's annual meeting of global business and political leaders in the Swiss mountain resort of Davos on January 28.