—Developing countries should prepare for further downside risks, as Euro Area debt problems and weakening growth in several big emerging economies are dimming global growth prospects, says the World Bank in the newly-released Global Economic Prospects (GEP) 2012.
The Bank has lowered its growth forecast for 2012 to 5.4 percent for developing countries and 1.4 percent for high-income countries (-0.3 percent for the Euro Area), down from its June estimates of 6.2 and 2.7 percent (1.8 percent for the Euro Area), respectively. The global economy is now expected to expand 2.5 and 3.1 percent in 2012 and 2013 (3.4 and 4 percent when calculated using purchasing power parity weights), versus the 3.6 percent projected in June for both years.
The world economy has entered a dangerous period. Some of the financial turmoil in Europe has spread to developing and other high-income countries, which until earlier had been unaffected. This contagion has pushed up borrowing costs in many parts of the world, and pushed down stock markets, while capital flows to developing countries have fallen sharply. Europe appears to have entered recession. At the same time, growth in several major developing countries (Brazil, India and, to a lesser extent, Russia, South Africa and Turkey) is significantly slower than it was earlier in the recovery, mainly reflecting policy tightening initiated in late 2010 and early 2011 in order to combat rising inflationary pressures. As a result, and despite a strengthening of activity in the United States and Japan, global growth and world trade have slowed sharply.
Country 2012f 2013f China 8.4 8.3 United States 2.2 2.4 Japan 1.9 1.6 India 6.5 7.7 Euro Area -0.3 1.1
If global financial markets freeze up, governments and firms may be unable to finance growing deficits. Countries should engage in contingency planning, prioritizing social safety nets and infrastructure spending to assure longer-term growth. Problems are likely to be particularly acute for developing countries with external financing needs that exceed 5 percent of GDP. Where possible, they should pre-finance to avoid abrupt cuts in government and private-sector spending.
• A renewed financial crisis could accelerate the ongoing financial-sector deleveraging process. Several countries in Eastern Europe and Central Asia, reliant on high-income European banks, are particularly vulnerable to a sharp reduction in wholesale funding and domestic bank activity.
• A severe crisis in high-income countries could put pressure on the balance of payments and government accounts of countries heavily reliant on commodity exports and remittance inflows. A severe crisis could cause remittances to developing countries to decline by 6 or more percent, with particularly acute impacts among the 24 countries where remittances represent 10 or more percent of GDP. Oil and metal exporting countries would also be affected in a major crisis. The fiscal balances of major oil and metal exporters could deteriorate by 4 or more percent of GDP. Although lower food prices would reduce incomes of producers (partially offset by lower oil and fertilizer prices), it would benefit consumers.