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Turbulent Year Ahead for Global Economy

January 18, 2012

  • Global Economic Prospects 2012 predicts turbulent year ahead
  • Developing world will still lead global growth, but at slower pace
  • ‘Second wave’ of financial crisis will take a toll on developing countries

Washington, DC, January 18, 2012—The world economy in 2012 is set to grow by just 2.5 percent, weighed down by ripple effects from the 2008 financial crisis, says the World Bank's latest Global Economic Prospects (GEP) 2012, published today.

The sovereign debt crisis in Europe, which took a turn for the worse in August 2011, coincides with slowing growth in several major developing countries (Brazil, India and, to a lesser extent, Russia, South Africa and Turkey), mainly reflecting policy tightening begun in late 2010 and early 2011 to combat rising inflationary pressures from overly-fast growth.

As a result, developing country growth for 2012 is now forecast at 5.4 percent, the second lowest over the past 10 years. The Bank has also lowered its growth forecast for high-income countries in 2012 to 1.4 percent and -0.3 percent for the high-income Euro Area.

Reflecting the growth slowdown, world trade, which expanded by an estimated 6.6 percent in 2011, will grow by only 4.7 percent in 2012, before strengthening to 6.8 percent in 2013.

Risk aversion stemming from the Euro Area debt crisis has spread to both developing countries and other high-income countries. Yields on the sovereign debt of developing countries have increased by an average of 117 basis points (bps) between July-end 2011 and early January 2012, as have those of most-all Euro Area countries, including France (86 bps) and Germany (36 bps), and those of non-Euro Area countries such as the United Kingdom (18 bps).

Capital flows to developing countries have weakened sharply as investors withdrew substantial sums from developing-country markets in the second half of 2011, with gross capital flows to developing countries plunging to $170 billion, only 55 percent of the $309 billion received during the same period in 2010.

Developing-country stock markets have lost 8.5 percent of their value since July-end. This, combined with the 4.2 percent drop in high-income stock-market valuations, has translated into $6.5 trillion, or 9.5 percent of global GDP, in wealth losses.

The GEP urges developing countries to preparing for further downside risks, while there is still time, by assessing their vulnerabilities and preparing for contingencies by pre-financing budgetary deficits, prioritizing spending on social safety nets and infrastructure spending to assure longer-term growth, and stress-testing banks to avoid an eruption of domestic banking crises.

The report’s Regional Annexes provide an in-depth analysis of the outlook for each developing region, identifying region-specific vulnerabilities and risks, and offering broad policy recommendations for mitigating the effects of a crisis that, the GEP says, will spare no-one.

In the East Asia and Pacific region, affected by flooding in Thailand and the turmoil in Europe, regional GDP growth is estimated to have slowed to 8.2 percent in 2011, and is projected to ease further to 7.8 percent for both 2012 and 2013. Growth in China was an estimated 9.1 percent in 2011 and is expected to dip to 8.4 percent in 2012.

Europe and Central Asia grew by an estimated 5.3 percent in 2011. However, the expected slowdown in high-income Europe, still troublesome inflationary pressures in the region, and reduced capital flows due to the Euro Area crisis may slow regional growth to 3.2 percent in 2012, before firming to 4.0 percent by 2013.

Latin America and the Caribbean grew by an estimated 4.2 percent in 2011, but this is expected to ease to 3.6 percent growth in 2012, before picking up to 4.2 percent in 2013. Weaker global growth, uncertainty arising from the Euro Area debt crisis, slower growth in China, and a policy-induced deceleration in domestic demand are weighing on the region’s growth prospects.

Dramatic political changes in the Middle East and North Africa have disrupted economic activity substantially, but selectively, across the region, while a deteriorating external environment slowed growth to an estimated 1.7 percent in 2011. Growth is expected to remain subdued in 2012, at 2.3 percent, rising to an expected 3.2 percent in 2013.

Growth in South Asia slowed to an estimated 6.6 percent in calendar year 2011, reflecting a sharp slowdown in the second half of the year in India as well as external headwinds. The region’s GDP growth is projected to ease further to 5.8 percent in 2012, before strengthening to 7.1 percent in 2013.

Growth in Sub-Saharan Africa remained robust in 2011 at 4.9 percent. Excluding South Africa, growth in the rest of the region was even stronger at 5.9 percent in 2011, making it one of the fastest growing developing regions. Growth for the region is projected to accelerate to 5.3 percent in 2012 and 5.6 percent in 2013.