A protracted recession

Given the severity of the downturn, its synchronized nature, and the weakened state of the world’s major financial institutions, there is much more than the usual level of uncertainty surrounding future prospects. 
As the recent outbreak of a novel form of influenza in Mexico serves to remind us (see Potential economic impacts of the A H1N1 flu outbreak), the world’s economy is at a particularly vulnerable juncture, where an event that might otherwise have carried relatively minor economic consequences could have a much broader impact.
 
Not all of the uncertainty concerns the possibility of slower growth, although the economic and human costs of a deeper or more protracted recession are most troubling. 
One upside scenario concerns the possibility that private sector confidence and the financial sector respond more robustly and more quickly than is assumed in the baseline.

Under such circumstances, the fiscal and monetary stimulus already in place could provoke a more rapid recovery than anticipated, which could rekindle inflationary pressures. 
In this scenario, the authorities would be forced to respond with a relatively quick tightening of policy measures that could induce a second round of below-potential growth toward the end of the projection period.

The main downside risk to the outlook is that the confidence and wealth effects of the financial crisis are much more persistent than in the baseline, and that the consolidation efforts of banks constrain lending more durably.
In this scenario, second-round effects intensify—including rising unemployment and the bankruptcy of firms that might have survived a milder recession and unemployment.

Instead of recovering somewhat during 2010, global investment could decline by another 5.5 percent, with the sharpest contractions in those countries experiencing the most marked reversals in capital flows and in investor confidence.

In this scenario, the projected rebound in private consumption would be much weaker due to slower income growth and higher savings, notably, in high- and middle-income countries where households have more discretionary income with which to maneuver. 
As a result, instead of rebounding as in the baseline, global trade would continue to decline, intensifying the pressures on the most vulnerable middle-income countries (those with current-account deficits in excess of 10 percent of GDP).

In the protracted recession scenario reported in table 1.10, this causes severe currency crises characterized by sharp exchange-rate depreciations and even more significant reductions in domestic spending in many economies.

Overall, this scenario implies that the fall in world output in 2009 would be deeper than in the baseline because the recovery expected in the second half fails to emerge. 
Output would stagnate in 2010, before rebounding by 3 percent in 2011.

World trade volumes would fall a further 4.7 percent in 2010, bringing global trade volumes almost 17 percent below 2008 levels.

In this scenario, GDP in developing countries would register a very modest 2.0 percent increase in 2010, with the bulk of the weaker performance concentrated in Europe and Central Asia, where GDP is projected to decline by an additional 1.5 percent.
Not all countries in the region would be affected equally, and several (such as Latvia, Lithuania, and the Russian Federation) are projected, even in this downside scenario, to experience stronger growth than in 2009.