World Bank cuts forecasts

By Paul Thomasch and Louise Ireland

NEW YORK/LONDON (Reuters) - The World Bank and Organization for Economic Co-operation and Development offered dispiriting assessments of the world economy on Monday, although corporate sentiment surveys in Germany and Japan created some hope that recovery could be on the way.

The surveys from Japan and Germany still expressed caution but indicated businesses are starting to feel more upbeat.

Indeed, German business sentiment rose to a seven-month high in June.

Japan's tankan survey showed less pessimism among big Japanese manufacturing companies.

Investors still found plenty to worry about, however. Oil prices dropped by 4 percent, while European and U.S. stocks began the week with losses on questions about the potential strength of an economic recovery.

The S&P 500 stock index had lost 2.5 percent by mid-afternoon in New York.

European Central Bank President Jean-Claude Trichet cautioned that policymakers must remain alert to financial risks despite initial signs that the pace of economic decline had slowed.

"While there are first signs that the pace of economic weakening is decelerating, we must remain alert. We are in uncharted waters, and there are still risks of a sudden emergence of unexpected financial turbulence," he said.

Angel Gurria, the head of the OECD, offered a similarly cautious assessment.

"We see a very difficult 2009, with negative growth in the OECD area. Unemployment problems are going to continue to linger," he told Reuters Television in an interview on the sidelines of a conference in Paris.

Adding to those wary comments, the World Bank said prospects for the global economy remain "unusually uncertain" as it cut 2009 growth forecasts for most economies.

SPENDING SPREES

Governments around the world have borrowed hundreds of billions of dollars to fight the worst economic crisis in decades, providing incentives for businesses and consumers to spend and embarking on big infrastructure programs to create jobs and stimulate activity.

They should stick to spending programs to reignite growth because their economies are still weak in spite of signs that the worst of the crisis may be past, World Bank Chief Economist Justin Lin said in an interview with Reuters.

Lin also said he was concerned about rising borrowing costs and weak external financing conditions for the emerging economies of Europe and Central Asia.