Goldman Cuts Global Growth Forecast to 1% Contraction

By Jennifer Ryan

March 13 (Bloomberg) -- Goldman Sachs Group Inc. cut its forecast for the global economy for the second time in eight days after predicting a deeper recession in Europe.

“Following the reduction of our Euroland growth forecast to minus 3.6 percent in 2009, the world economy is now likely to contract by 1 percent this year,” said London-based Goldman economist Binit Patel. On March 5, Goldman lowered its 2009 outlook for world gross domestic product to a drop of 0.6 percent from a 0.2 percent decline.

Finance ministers from around the world are meeting near London today and tomorrow to find a way to battle the worst world recession since World War II. Governments have already pumped billions of dollars into financial systems to prop up banks and other industries after the worldwide credit squeeze stifled growth. Goldman expects the U.S. economy to shrink 3.2 percent this year and the U.K. economy to contract 2.5 percent.

With export demand slumping, industrial output has collapsed across Europe. Production in Germany, the region’s largest economy, dropped 7.5 percent in January from December, the biggest decline since data for a reunified Germany began in 1991. German factory orders plunged 38 percent from a year earlier.

Goldman predicts Germany’s economy will contract 5.2 percent this year, twice as much as its previous forecast. France’s economy will shrink by 2.9 percent and Spain’s by 3.6 percent, Goldman economists wrote in a research note. They expect unemployment in the 16-nation euro region to rise to 10 percent from 8.2 percent today.

Downside Risks

“The risks to these forecasts are on the downside,” the Goldman economists wrote. “The financial and global nature of the crisis make unexpected, harmful interactions more likely and could also mute the recovery. In addition, further waves of falling demand and output may bring the risk of deflation into focus.”

The European Central Bank on March 5 cut its key interest rate to 1.5 percent, the lowest in its history. President Jean- Claude Trichet indicated the benchmark may fall further as the bank expects inflation to stay “well below” its 2 percent ceiling this year and next.

“We see the ECB cutting interest rates to 0.5 percent by the end of the summer and engaging in unconventional, quantitative easing in the coming months,” the Goldman economists said.

Fed, BoE

The Federal Reserve has reduced its key rate to a range of zero to 0.25 percent and the Bank of England has cut its benchmark to 0.5 percent, the lowest since it was founded in 1694. Both are now using unconventional measures to boost their economies.

The World Bank said last week the global economy may contract for the first time since World War II this year, and trade will decline by the most in 80 years.

The Institute of International Finance predicts the world economy will shrink “close to” 2 percent in 2009. The IIF, which represents 380 financial institutions worldwide, today urged governments to pass stimulus measures that will have an “immediate effect” and said further rate cuts may be necessary.

“The uncertainties are very big,” ECB Governing Council member Nout Wellink told reporters at an event in Amsterdam today. “We will have a pretty bad first quarter for the whole world, just like we had a bad last quarter last year.”

Finance officials from the Group of 20 nations are meeting to discuss approaches to solving the financial crisis as a rift develops between Europe and the U.S.

European ministers are calling for a focus on tighter regulation, while President Barack Obama is looking for governments to boost spending.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net