AUSTRALIA should brace for a return to the ''ugliest'' of times if the latest World Bank warning of a new financial crisis proves correct, a leading economist says.
The World Bank yesterday signalled a downturn so severe it would eclipse the chaos that followed the collapse of Lehman Brothers in 2008. Deloitte Access Economics director, Chris Richardson, said if there was not a sharp turnaround overseas, Australians were in for a rocky ride through a ''GFC Mark II''.
''If we get a re-run of last time, you get higher unemployment, sharp hits to company profits and a slowdown in the Australian economy without a technical recession, largely due to the momentum in the big mining construction projects,'' he said.
Launching the World Bank's latest six-monthly assessment of global prospects in Beijing, the bank's lead economist, Andrew Burns, called on vulnerable nations to prepare for the worst and refinance loans now rather than waiting until funds dry up.
The bank halved its previous 2012 forecast for economic growth in high-income countries and is forecasting negative growth for the collection of nations that use the euro as their currency. Its concern is that financial markets could stop working if lenders refuse to roll over European debts.
"A much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic cannot be ruled out," the report says. "Should this happen the ensuing global downturn is likely to be deeper and longer-lasting than the recession of 2008-09.
"Countries do not have the fiscal and monetary space to stimulate the global economy or support the financial system to the same degree as they did in 2008-09. While developing countries are in better shape than high-income countries, they too have fewer resources available. No country and no region will escape."
Australia, not specifically mentioned in the report, has a relatively good budget position and a better ability than most to ward off a downturn by interest rate cuts and increased government spending, as it did in 2008.
But the bank says commodity-exporting nations such as Australia will find their budgets hit by much lower prices.
Each of its scenarios are worse than envisioned in the government's December budget update, calling into question the government's forecast of a 2012-13 budget surplus.
The acting Treasurer, Bill Shorten, acknowledged the budget would "obviously be hit".
"The past year was difficult and disappointing for the global economy. The outlook for 2012 looks even more challenging," he said. "But the Australian economy is now around 7 per cent larger than it was prior to the global financial crisis … We have a proven track record having fought off the global recession and the worst the world can throw at us."
The World Bank is forecasting worldwide economic growth of just 2.5 per cent this year, down from its previous forecast of 3.6 per cent. Anything less than 3 per cent is commonly defined as a global recession.
Mr Richardson said the ''horror headline'' effect of reporting on the European financial fiasco was to blame for a sharp downturn in domestic consumer confidence.
''When you have the papers and the nightly news full of reports - and rightly - that Europe is in trouble, the banks are in danger of blowing up and all the dire outcomes that would produce, you get people worrying about their own situation, even though the economic settings are very different in Australia than those of overseas.''
Read more: http://www.smh.com.au/business/financial-crisis-get-ready-for-next-wave-20120118-1q6n3.html#ixzz1jux13ZHB
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