Developing Countries Lead Recovery, But High-Income Country Debt Clouds Outlook

June 9, 2010

Washington, DC, June 9, 2010 — The global economic recovery continues to advance, but Europe’s debt crisis has created new hurdles on the road to sustainable medium term growth, cautions the World Bank’s latest Global Economic Prospects 2010, released today online.

The World Bank projects global GDP to expand between 2.9 and 3.3 percent in 2010 and 2011, strengthening to between 3.2 and 3.5 percent in 2012, reversing the 2.1 percent decline in 2009. Developing economies are expected to grow between 5.7 and 6.2 percent each year from 2010-2012. High-income countries, however, are projected to grow by between 2.1 and 2.3 percent in 2010—not enough to undo the 3.3 percent contraction in 2009—followed by between 1.9 and 2.4 percent growth in 2011.

“The better performance of developing countries in today’s world of multipolar growth is reassuring,” said Justin Yifu Lin, the World Bank’s Chief Economist and Senior Vice President, Development Economics. “But, for the rebound to endure, high-income countries need to seize opportunities offered by stronger growth in developing countries.”

The recovery faces several important headwinds over the medium term, including reduced international capital flows, high unemployment, and spare capacity exceeding 10 percent in many countries. According to the report, while the impact of the European debt crisis has so far been contained, prolonged rising sovereign debt could make credit more expensive and curtail investment and growth in developing countries.

On the upside, world merchandise trade has rebounded sharply and is expected to increase by about 21 percent this year, before growth rates taper down to around 8 percent in 2011-2012. Almost half of the rise in global demand in 2010-2012 will come from developing countries. 

The World Bank’s projections assume that efforts by the IMF and European institutions will stave off a default or major European sovereign debt restructuring. But even so, developing countries and regions with close trade and financial connections to highly-indebted high-income countries may feel serious ripple effects.

“Demand stimulus in high-income countries is increasingly part of the problem instead of the solution,” said Hans Timmer, director of the Prospects Group at the World Bank. “A more rapid reining in of spending could reduce borrowing costs and boost growth in both high-income and developing countries in the longer run.”

Regardless of how the debt situation in high-income Europe evolves, a second round financial crisis cannot be ruled out in certain countries of developing Europe and Central Asia, where rising non-performing loans, due to slow recovery and significant levels of short-term debt, may threaten banking-sector solvency.

“Developing countries are not immune to the effects of a high-income sovereign debt crisis,” said Andrew Burns, manager of global macroeconomics at the World Bank. “But we expect many economies to continue to do well if they focus on growth strategies, make it easier to do business, or make spending more efficient. Their goal will be to ensure that investors continue to distinguish between their risks and those of these high-income countries.”

Many developing countries will continue to face serious financing gaps. Private capital flows to developing countries are forecast to recover only modestly from $454 billion (2.7 percent of the developing world’s GDP) in 2009 to $771 billion (3.2 percent of GDP) by 2012, still far below the $1.2 trillion (8.5 percent of GDP) in 2007. Overall, the financing gap of developing countries is projected to be $210 billion in 2010, declining to $180 billion in 2011—down from an estimated $352 billion in 2009.

Over the next 20 years, the fight against poverty could be hampered if countries are forced to cut productive and human capital investments because of lower development aid and reduced tax revenues, the report says. If bilateral aid flows decline, as they have in the past, this could affect long-term growth rates in developing countries—potentially increasing the number of extremely poor in 2020 by as much as 26 million.

Note to journalists:
The World Bank will now update its short-term growth forecasts twice a year via Global Economic Prospects.

Fact Sheet: Global Economic Prospects 2010 (June) Regional Outlook:

The East Asia and Pacific region is expected to grow by 8.7 percent in 2010 and 7.8 percent in 2011. The region has benefitted from close links with China, which led the recovery. However, the earlier strong momentum in regional exports and production is waning and output gaps are closing rapidly, and supply constraints are becoming an increasingly binding constraint on growth. Coupled with strong capital inflows and rising liquidity, this may put pressure on both goods and asset inflation. Reflecting these factors, regional and Chinese growth are forecast to slow to an average 7.8 and 8.4 percent respectively over the next two years.

The recovery in Europe and Central Asia is projected at 4.1 percent in 2010, 3.0 percentage points slower than the region’s pre-crisis five-year average. The rebound reflects strong growth in the region’s two largest economies (Russia and Turkey), which account for three-fourths of regional GDP. Growth in most other regional economies is expected to be relatively weak or remains negative, continuing to be constrained by the pronounced adjustments that some countries have had to undergo as a consequence of large pre-crisis current account deficits. Heightened uncertainty tied to the sovereign-debt crisis in some of high-income European countries (Greece, Ireland, Italy, Portugal, and Spain) has created additional headwinds for the region.

The recovery in Latin America and the Caribbean region—dominated by middle-income countries and commodity exporters—has benefitted from a limited revival in commodity prices, strong export demand, and a rebound in the inventory cycle. After contracting by an estimated 2.3 percent in 2009, output in the region is forecast to expand by around 4.3 percent each year over 2010-2012, just somewhat slower than during the boom period. Strong trade and financial ties to Europe make the region especially sensitive to developments in highly-indebted European economies.

The outlook for the Middle East and North Africa region will continue to be driven by oil prices and economic activity in the European Union (the region’s main trade partner). The oil price collapse at the onset of the financial crisis together with OPEC production restraints significantly reduced oil revenues, cutting into intra-regional foreign direct investment flows, remittances, and tourism receipts. However, export volumes and values are forecast to rebound, rising by 2.0 and 13.5 percent respectively in 2010. Moreover, the regional recovery is projected to strengthen, with growth firming from 4.0 percent in 2010 to 4.3 and 4.5 percent in 2011 and 2012, respectively.

GDP in South Asia has benefitted from stimulus measures (notably in India, and to a lesser extent in Bangladesh and Sri Lanka), relatively robust remittance inflows, which continued to expand (in contrast to declines elsewhere), and the recovery in global demand. The region also benefitted from relatively resilient capital inflows, which rose in level terms and as a share of GDP—from 3.6 percent in 2008 to 3.9 percent in 2009—and was supported by long-standing capital account restrictions. A combination of slower global growth, tighter financial conditions, and a consolidation of fiscal policy in some countries in the region is expected to cause growth to average 7.7 percent over 2010-2012, compared with the pre-crisis rate of 9.2 percent in 2007 (calendar year basis).

The outlook for the Sub-Saharan Africa region—dominated by low-income and commodity-exporting countries—is expected to continue to strengthen slowly, driven by historically high commodity prices and stronger external demand. Overall the region is forecast to grow by 4.5, 5.1, and 5.4 percent respectively over 2010–2012, up from an estimated 1.6 percent in 2009. The recent depreciation of the Euro should help the competitiveness of countries whose currencies are tied to the Euro.

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