Lost decade of growth for the West

Sun Jan 22, 2012 3:14pm EST
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By Stella Dawson

(Reuters) - Five years after the credit crisis began, Western economies are confronting the prospect of a lost decade of growth, and international diplomats are warning the damage could get even worse if Europe allows its sovereign debt crisis to fester much longer.

International Monetary Fund chief Christine Lagarde is heading to Berlin on Monday to urge action after the IMF called for member countries to provide the fund with $500 billion for new loans to help out troubled countries.

G20 officials also say Europe must double the size of its rescue fund to $1 trillion as a crucial step to stabilize financial markets and prevent the euro-zone crisis from spreading. Europe finance ministers meet on their debt plan on Tuesday.

The World Bank already sees the damage taking hold as European banks pull back their lending to emerging economies. Last week it slashed its growth forecast more than one percentage point to 2.5 percent for 2012, a pace not seen since 2008 when the world was last in a global recession.

"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," Justin Lin, the chief economist for the World Bank, said.

The IMF also is set to cut its growth forecasts this week.

Although the United States has shown encouraging signs in recent weeks, the economy remains far too feeble for any upturn to be either strong or sustained. Europe is no better off and already appears to have fallen back into a mild recession.

Goldman Sachs calculates that per capita GDP growth in the United States has shrunk by 0.7 percent each year between 2007 and 2011, compared with 2.0 percent growth in the decade prior to the recession. In the euro area, the decline has been similar, 0.6 percent drop against a 1.8 percent pre-recession rate.   Continued...

<p>A pedestrian passes a man sat waiting at a shoe shine stall in the City of London January 20, 2012. REUTERS/Luke MacGregor</p>