The Bankwatch

Tracking the consumer evolution of financial services

World Bank GDF highlights growing risks to economic forecasts

When thinking about the future and the economic position of countries that banks must consider, I listen far less to politicians and more to IMF and World bank forecasts.

The use (misuse) of the term recovery fails to acknowledge what the circumstances for people and businesses will be on the other side of the recession.

Here is a new report from World Bank that looks to the future with more pragmatism, although they still use the word recovery.  Note their focus is skewed by their mandate for developing countries, however they have to look at the entire economic picture to get there.

Global Development Finance 2009: Charting a Global Recovery | World Bank

The world is transitioning from an extended credit boom and economic overheating to an era of slower growth. Looking to medium-term developments, participants in the international financial system—consumers, investors, traders, and firms—must adapt their behavior to the new realities of tightened credit conditions, a prominent role of the state in financial affairs, large excess capacity in many industrial sectors, and more closely coordinated regulatory policy

The use of the word transition here is important.  Consumers and businesses are moving from one reality (pre 2007) to another over the next 5 years.  That transition affects all bank customers, so its worth considering the impact of those shifts, and how products and services ought to be re-thought.

In simple terms the booms over the last 10 years which banks saw in mutual funds and mortgages with easy product volume crashing through the door will be replaced with thoughtful and careful consumers, who are wary of banks, for multiple reasons.  Banks took a credibility hit over the last 2 years, and that credibility will take time to restore.

Confidence in the international financial system must be restored

On a final note, it is important to recognize how the severity of the current crisis has undermined confidence in the international financial system (annex 3B). Many economic and financial indicators have exhibited unprecedented declines, moving us into uncharted territory in several respects. Uncertainty surrounding the outlook remains at an all-time high, suggesting that a nascent global recovery will be vulnerable to after-shocks of the present crisis and may not survive any marked deterioration in financial conditions.

consumer investor confidence

(Source:  World Bank use both market- and survey-based proxies to gauge investors’ confidence, combining them with measures of consumer confidence in Canada, Germany, Japan, the United Kingdom, and the United States to extract a common global index, using the  well-established method of principal component analysis.)

The report has downgraded the view on growth for 2010, and as important speaks at length about the risk associated with the projection still being too optimistic.  The graph does suggest that investor confidence is ahead of consumer confidence.

The report calls for an increase in breadth and depth of financial services regulation.  The association of government with banks through increased balance sheet support, and regulation could be a double edged sword.  Government influence suggests increased safety, but it also implies more costly services.  Customers will watch this influence carefully, and look for those banks that match their expectations and needs.

Written by Colin Henderson

June 22, 2009 at 12:01

Posted in economy

Tagged with , ,

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