World Bank Predicts Slower Growth and Urges Precautions

In a report released Tuesday, the Washington-based bank lowered its growth forecasts for high-income and low-income countries, saying it expected the world economy to expand an aggregate 2.5 percent in 2012, down from about 2.7 percent in 2011. In its previous estimate, in June, it forecast growth of 3.6 percent in 2012.

The bank also warned of the continued threat of a global financial shock “similar in magnitude to the Lehman crisis,” because of the possibility that a major European economy could be shut out of the global debt markets. In that case, the bank estimated the damage to the world’s economic growth would rival the recession of 2008 and 2009.

“The largest economy in the world is weakening,” Justin Yifu Lin, the bank’s chief economist, said in an interview, referring to the European Union. “The message for developing countries is to start preparing now.”

The report was issued as forecasters warned of slower growth in the United States. Estimates of the nation’s annual pace of growth reached as high as 4 percent in the final months of 2011. But economists contend the strength came in part from temporary measures, including wholesalers restocking their inventories and consumers saving less and spending more over the holidays.

Economists say they expect many headwinds in early 2012: rising oil prices as the United States and European countries confront Iran; the risk of a tax cut for American wage earners expiring; a strong dollar rendering American exports less competitive; and continued repercussions from the sovereign debt crisis in Europe.

In the report, the biannual Global Economic Prospects, the bank predicted that high-income countries, including the United States, France, Japan and Germany, would grow 1.4 percent in 2012. It forecast a mild contraction of 0.3 percent in the 17 countries that use the euro. Developing countries will grow 5.4 percent, down from a forecast of 6.2 percent in June, the bank said.

The reason for the global slowdown is twofold, said Andrew Burns, head of global macroeconomics at the World Bank and the main author of the report. First, developing countries like Turkey, India, Russia and Brazil were “overheating” in the rebound after the recession and have tightened monetary policy to help curb inflation, he said. Second, he added, the euro zone crisis has frightened investors, and austerity budgets adopted in countries, including Italy and Greece, have weighed on growth.

Mr. Burns said those trends created a “dangerous dynamic,” with the slowdown in emerging economies sapping growth from advanced economies, and the downturn in advanced economies worsening prospects for emerging markets. “The events are feeding off of one another,” he said.

A worst case in Europe could lead to significant hardship for emerging economies, the report said. Commodity prices could fall as much as 24 percent, hurting government revenue in export-dependent nations. Global trade volumes could fall by more than 7 percent. Countries in Central Asia and Eastern Europe would be hit hardest, the bank said.

But even if catastrophe does not occur, growth looks weaker, the bank said. For instance, the World Bank estimates world trade will expand only 4.7 percent in 2012, down from 12.4 percent in 2010.

Last summer, the World Bank noted significant “contagion from Europe to developing countries,” Mr. Burns said. Risk-averse investors slashed financing to emerging markets, with gross capital flows falling to $170 billion in the second half of 2011 from about $309 billion in the same period in 2010. In addition, borrowing costs began to rise in developing countries.

The bank said developing economies should prepare for declining investment from abroad, less-robust exports, and reduced remittances. Governments should rigorously stress test their financial institutions, plan major infrastructure projects to help support demand and ensure the viability of their social safety nets, the report said.

Mr. Lin said advanced economies should consider more immediate fiscal stimulus to support growth, locally and globally. “They need to carry out structural reforms in the long-term,” he said. “But in the short term, they need an intervention to provide a short-term boost to demand.”

He warned that emerging markets have less room for fiscal and monetary stimulus than they did in 2008 and 2009, even though they have more capacity than many developed countries. Many high-income countries, including the United States, are already struggling with heavy debt loads, limiting the possibility of fiscal stimulus. And central banks have already overextended their balance sheets and pushed interest rates close to zero, limiting monetary stimulus, Mr. Burns said in an interview.

The International Monetary Fund, the World Bank’s sister organization, echoed its warnings about the dangers slowing trade and uncertainty about Europe pose to emerging markets.

In a speech Monday, David Lipton, the fund’s first deputy managing director, said there was reason for optimism, given the lessons learned in the 2008 crisis. But, he warned: “Europe could be swept into a downward spiral of collapsing confidence, stagnant growth and fewer jobs. And in today’s interconnected global economy, no country and no region would be immune from that catastrophe.”

The fund is expected to update its World Economic Outlook on Jan. 24. It said it would cut its growth forecast from predictions it issued last September.

World Bank officials emphasized the importance of confidence, given uncertainty about Europe and worries about slowing growth. Mr. Burns said investor sentiment “could have an enormous impact cumulatively.”

Article source: http://feeds.nytimes.com/click.phdo?i=03edb72c48cdd211d1033157208e7071