World Bank lowers 2012 global growth forecast

The World Bank has revised their original global growth forecast and acknowledged that the world is under threat of another crisis. The bank lowered its global growth forecast from 6.2% to 5.4% for developing countries and lowered a growth forecast from 2.7% to 1.4% for high-income countries.

By Prabha Natarajan
Jan. 17, 2012, 9:19 p.m. EST
Market Watch

NEW YORK (MarketWatch) -- The World Bank has revised downward its global growth forecast for 2012, acknowledging that the world is in a precarious position under threat of a Lehman-like crisis engulfing capital markets.

The bank's worst-case scenario--the freezing of financial market access to up to four euro-zone countries--would cause growth to shrink even more.

The bank's latest global growth forecast for 2012 is 5.4% for developing countries, down from 6.2% previously projected, 1.4% for high-income countries from 2.7%.

While the bank doesn't expect the worst case to come true, "we are examining the possibility that things could go worse," said Andrew Burns, manager of Global Macroeconomic Trends, development prospects group of the World Bank.

The purpose of the dire tone to the biannual Global Economics Prospects 2012 report is to assist developing countries in preparing for such possibilities, he said.

The World Bank's concern is that both developed and developing countries have diminished ability to withstand a global crisis this time around, Burns said. High-income nations don't have the fiscal resources to stabilize markets or support financial institutions in distress, he said. Emerging economies already were in the midst of a slowdown induced by raising policy rates aimed at cooling inflation, and the European crisis is adding to this weakness.

Burns and other bank analysts say in the report that growth prospects have turned bleak over the past six months as contagion from the European Union spreads to the rest of the world.

The warning implied in the report comes at a time when fears of a Greek default are on the rise, and after nine European nations including France and Austria saw their ratings downgraded last week.

As a baseline projection, the report assumes that the coordinated central bank effort to prevent a sovereign-debt crisis has put a stop to the panic, but failed "to completely eradicate market concerns."

Growth in the U.S. and Japan is improving, but remains weak, notes the report. And indicators suggest Europe is entering a recession, while emerging markets, which pleasantly surprised the world with how well they were able to withstand the 2008 global credit crisis, have witnessed a slowdown that has led to rapid easing of monetary policy.

By early January, emerging market bond spreads had widened by an average of 117 basis points from their end-of-July levels, and developing country stock markets had lost 8.5% of their value. This, combined with the 4.2% drop in high-income stock-market valuations, has translated into $6.5 trillion, or 9.5% of global GDP, in wealth losses.

China, the largest emerging market economy, is expected to grow at a rate of 8.4%. While the World Bank doesn't expect China to implement any stimulus, like it did in 2008-09 with its rapid infrastructure development, an increase in Chinese consumption would boost other commodity exporters like Brazil, South Africa and Argentina.

"Developing countries will have to search increasingly for growth within the developing world, a transition that has already begun but is likely to bring with it challenges of its own," the report said.

The report recommends that developing countries with external financing needs that exceed 10% of GDP [for maturing short and long-term debt, and current account deficits] raise money as early as possible to avoid future hurdles.

The report estimates developing economies' external financing needs at $1.3 trillion this year.

The slowdown in global growth is expected to weaken commodity prices. Oil is expected to drop 5.5% to $98.20 per barrel, while non-oil commodities are expected to ease by 8.9% in the base-case scenario.

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