UPDATE 2-World Bank says global economy to shrink 1-2 pct

Wed Mar 11, 2009 10:35pm EDT

* Global economy on track for worst recession since 1930s

* Central and eastern Europe particularly exposed

* World Bank lending set to rise almost threefold this year

By Christina Fincher

LONDON, March 12 (Reuters) - The global economy is on track for its worst recession since the 1930s with output likely to shrink by 1-2 percent this year, World Bank President Robert Zoellick told the Daily Mail newspaper.

Central and eastern European countries were particularly vulnerable, he said, urging rich nations to do more to fill the financing gap left by an exodus of capital from the developing world.

"My guess is that growth will probably fall about 1 to 2 percent," he told the paper in its Thursday edition.

"We haven't seen numbers like that since World War Two, which really means the Thirties. So these are serious and dangerous times."

The head of the International Monetary Fund, Dominique Strauss-Kahn, warned the world on Wednesday it would be gripped by a "Great Recession" and that his earlier forecast for economic stagnation this year was too optimistic.

Zoellick trade would probably fall at its fastest rate in 80 years. Eastern Europe was especially at risk, he said, noting that many countries in the region had the problem of assets such as mortgages denominated in foreign currencies which had leapt in local terms.

"Central and eastern Europe is particularly exposed because over the last two decades it moved quickly to integrate with trade, investment and remittances," he said.

"You also have the problem of domestic assets in foreign currencies, whether it be euro or Swiss francs."

Zoellick said G20 leaders, due to meet in London on April 2, should focus on sorting out problems in the banking system rather than additional fiscal measures to boost demand.

That view may put him at odds with the United States and Britain which have both urged G20 nations to increase spending to pull the economy out of recession.

"Stimulus plans will be like a sugar high unless you fix the banking system," Zoellick said.

The World Bank chief said the financial crisis had greatly increased demand for his institutions funds.

"Last year we did about $3.5 billion, this year we will probably do about $35-$36 billion," he said.

"Developed countries understandably focus on their stimulus packages and bailing out their own banks. But if they could just devote 0.7 percent of their stimulus to those most in need, it could help the developing world."

Zoellick says the World Bank was also seeking to raise money through its private-sector arm, the International Finance Corporation. "We could probably do $30 billion of IFC lending for the next three years," he said. (Editing by Elizabeth Piper)

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