World Bank cuts global economic forecasts

01-18-2012, 02h05

The World Bank slashed its global economic growth forecasts and warned that rich nations' debt problems may yet reap a crisis that would eclipse the tumult of 2008.

Citing weakness across the globe, the Washington-based lender projected global growth of 2.5 percent in 2012 and 3.1 percent in 2013 -- sharply lower than previous estimates of 3.6 percent for both years.

"The world economy has entered a very difficult phase characterized by significant downside risks and fragility," the twice-yearly Global Economic Prospects report said.

While financial turmoil appeared contained at the moment, "the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains."

High-income countries cannot count on the willingness of markets to finance their deficits and maturing debt, it warned.

If shunned by the markets, a much wider financial crisis could sweep private banks and financial institutions on both sides of the Atlantic.

"The world could be thrown in a recession as large or even larger than that of 2008/09."

Only partly recovered from that global slump, both high-income and developing countries require bolstering to withstand the impending slowdown, the World Bank said.

"In the event of a major crisis" countries could be forced to cut spending, which would further deepen the negative cycle.

Financial turmoil in both developing and high-income countries has slammed the brakes on global growth despite relatively strong activity in the United States and Japan, it said.

The global economy grew at an estimated 2.7 percent rate in 2011, according to World Bank figures.

In addition, growth in several major developing countries, particularly Brazil and India, has slowed in part because of domestic policy tightening.

"Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time," said Justin Lin, the World Bank's chief economist.

Developing country growth was revised down to 5.4 percent in 2012 from 6.2 percent in the June projections.

Hans Timmer, director of the bank's Development Prospects Group, said uncertainty could reduce demand for investment in emerging markets.

"That is what we are the most concerned about, because ultimately, it is currently investment in the developing world that drives global growth," he told reporters.

High-income countries, meanwhile, were expected to grow a tepid 1.4 percent this year, weighed down by a 0.3 percent contraction in the 17-nation eurozone.

World trade also was slowing sharply, with growth seen at only 4.7 percent for this year compared with an estimated 6.6 percent in 2011.

But the World Bank warned that even achieving these much weaker outcomes was "very uncertain" considering the risks.

"The downturn in Europe and weaker growth in developing countries raises the risk that the two developments reinforce on another, resulting in an even weaker outcome."

It also noted that oil supplies could be disrupted amid potential political tensions in the Middle East and North Africa.

High deficits and debts in the US and Japan, as well as a slow-trend growth in gross domestic product (GDP), or economic output, in other high-income countries, "could trigger sudden adverse shocks."

The World Bank projected the United States, the world's largest economy, would grow 2.2 percent this year as it slowly recovers from the Great Recession.

Japan would emerge from last year's recession with GDP growth of 1.9 percent in 2012.

China again would be the planet's growth engine, although at a slower pace of 8.4 percent this year, compared with a 9.2 percent jump in 2011.

Lin said the worldwide slowdown would affect China's export-driven economy.

"But the Chinese government is one of the less indebted in the world. If necessary, it has relatively large room for maneuver to stimulate the economy."

Capital flows to developing countries have shrunk by almost half compared with 2010, the World Bank said, calling on them to "prepare for the worst."

The 30 developing countries with financing needs that exceed 10 percent of GDP should seek to refinance those needs "now," it said.

It also recommended prioritizing social safety net and infrastructure programs that are key to longer-term growth.

Noting a recent decline in commodity prices had eased inflation in most developing countries, the bank said that nonetheless "food security for the poorest, including in the Horn of Africa, remains a central concern."