Global slowdown 'will affect developing countries'

World Bank, developing countries, Euro Area. debt. economies, growth The World Bank has warned that developing countries should prepare for further downside risks.The World Bank has warned that developing countries should prepare for further downside risks, as Euro Area debt problems and weakening growth in several big emerging economies are diminishing global growth prospects

In the World Bank’s recently released Global Economic Prospects (GEP) 2012, the bank has lowered its growth forecast for 2012 to 5.4 per cent for developing countries and 1.4 per cent for high-income countries (-0.3 per cent for the Euro Area), down from its June estimates of 6.2 and 2.7 per cent (1.8 per cent for the Euro Area), respectively. Global growth is now projected at 2.5 and 3.1. Using purchasing power parity weights, global growth would be 3.4 and 4.0 per cent for 2012 and 2013, respectively.

Slower growth is already visible in weakening global trade and commodity prices. Global exports of goods and services expanded an estimated 6.6 per cent in 2011 (down from 12.4 per cent in 2010), and are projected to rise by only 4.7 per cent in 2012. Meanwhile, global prices of energy, metals and minerals, and agricultural products are down 10, 25 and 19 per cent respectively since peaks in early 2011. Declining commodity prices have contributed to an easing of headline inflation in most developing countries. Although international food prices eased in recent months, down 14 per cent from their peak in February 2011, food security for the poorest, including in the Horn of Africa, remains a central concern.

“Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time,” said Justin Yifu Lin, the World Bank’s Chief Economist and Senior Vice President for Development Economics.

Developing countries have less fiscal and monetary space for remedial measures than they did in 2008/09. As a result, their ability to respond may be constrained if international finance dries up and global conditions deteriorate sharply.

To prepare for that possibility, Hans Timmer, Director of Development Prospects at the World Bank, said: “Developing countries should pre-finance budget deficits, prioritise spending on social safety nets and infrastructure, and stress-test domestic banks.”

While prospects in most low-and middle-income countries remain favourable, the ripple effects of the crisis in high-income countries are being felt worldwide. Already, developing country sovereign spreads have increased 45 basis points on average and gross capital flows to developing countries plunged to US$170bn in the second half of 2011, compared with US$309bn received during the same period in 2010.

“An escalation of the crisis would spare no-one. Developed- and developing-country growth rates could fall by as much or more than in 2008/09,” said Andrew Burns, Manager of Global Macroeconomics and lead author of the report. “The importance of contingency planning cannot be stressed enough.”

The full report and accompanying datasets are available at www.worldbank.org/globaloutlook

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