January 18, 2012 2:00 am
World Bank warns emerging nations
Developing countries should take steps to plan for a global economic meltdown on a par with 2008-09 if the European sovereign debt crisis escalates, the World Bank warned on Wednesday in its latest economic forecasts.
Predicting significantly slower global growth in 2012 than it expected last summer even if the eurozone muddles through its crisis, World Bank economists said that if financial markets deny funds to eurozone economies, global growth would be about 4 percentage points lower than even these figures, with poorer economies far from immune.
Andrew Burns, head of macroeconomics at the Bank, told journalists in London: “Developing countries should hope for the best and prepare for the worst.”
Stressing the importance of contingency planning, he added: “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.”
The world economy would find it much more difficult to grow out of a new economic crisis, the World Bank warned, because rich countries had little monetary or fiscal ammunition available to stem any vicious circle and poorer countries now have “much less abundant capital, less vibrant trade opportunities and weaker financial support for both private and public activity [than in 2009]”.
The World Bank declined to predict how likely such a scenario was and added that there was little that developing countries could do to prevent a severe crisis, but urged them to evaluate their vulnerability to a euro-led crisis.
Even without a descent into a fresh crisis, the World Bank’s economic forecasts are significantly lower than those in June 2011, reflecting downside risks seen last summer which have already materialised. Using market exchange rates, the global economy is likely to grow by 2.5 per cent in 2012 and 3.1 per cent in 2013 compared with forecasts of 3.6 per cent for both years forecast only six months ago.
It expects the eurozone economy to contract in 2012 and other advanced economies to grow by only 2.1 per cent. The downgrade reflects heightened uncertainties over advanced economies which might in turn reduce the growth of world trade and demand from poorer economies.
“The motor of the global economy – developing nations – is slower at the same time as the world’s largest economic area – the EU – is in recession and these could feed on each other,” Mr Burns said.
If such a vicious circle were to develop, developing countries would find it impossible to decouple from European woes, he added. Many would be affected by falling oil and commodity prices, remittances sent home from workers in rich countries could fall more than 5 per cent along with income in rich countries, banking systems in poor countries would be vulnerable to financing risk as many developing countries have significant short-term debt falling due in 2012 and a confidence crisis would also hit spending in rich and poor countries alike.
China was the only large economy that had the capacity and will to implement policies to counter a new global downturn, Mr Burns said, but even the world’s second-largest economy’s power to counter recessionary forces would be weaker than in 2008 because the bank lending stimulus created an overheated housing sector while other methods of stimulating growth would be slower and less effective in stimulating demand.
Copyright The Financial Times Limited 2012.
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