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World Bank predicts global slowdown

Says hard-won gains in Latin America, Caribbean at risk

Thursday, January 19, 2012    

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BEIJING, China — Developing countries have been advised to prepare for further downside risks, as Euro Area debt problems and weakening growth in several big emerging economies are dimming global growth prospects, the World Bank said in its newly-released Global Economic Prospects report.

The World Bank has lowered its growth forecast for 2012 to 5.4 per cent for developing countries and 1.4 per cent for high-income countries, down from its June estimates of 6.2 and 2.7 per cent, respectively.

The report said Latin America and the Caribbean (LAC), in particular, is expected to grow 3.6 per cent in 2012, and 4.2 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 growth prospects, it said. Several countries in the region could be hard hit, if international commodity prices were to weaken sharply, it added.

"Slower growth is already visible in weakening global trade and commodity prices. Global exports of goods and services expanded an estimated 6.6 per cent in 2011 (down from 12.4 per cent in 2010), and are projected to rise by only 4.7 per cent in 2012," the World Bank said. Meanwhile, global prices of energy, metals and minerals, and agricultural products are down 10, 25 and 19 per cent, respectively, since recent peaks in 2011. Declining commodity prices have contributed to an easing of headline inflation in most developing countries. Although international food prices eased in recent months, down 14 per cent from their peak in February 2011, food security for the poorest, including in the Horn of Africa, remains a central concern.

"Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time," said Justin Yifu Lin, the World Bank's chief economist and senior vice-president for development economics.

Developing countries have less fiscal and monetary space for remedial measures than they did in 2008/09. As a result, their ability to respond may be constrained if international finance dries up and global conditions deteriorate sharply, the report said.

According to Augusto de la Torre, World Bank Chief Economist for Latin America and the Caribbean, it is still unclear how much the current Euro-zone debt crisis will impact the region. "If Chinese growth remains strong and global liquidity and commodity prices remain relatively high, the region should continue to enjoy solid if somewhat slower growth. Sustaining and raising long-term growth will require continued emphasis on investment and productivity enhancing policies, said de la Torre.

"In a catastrophic scenario where elevated risk aversion shuts down credit and stalls capital inflows to emerging markets, China becomes unable to fully offset a decline in its exports, and commodity prices drop, LAC would need to activate all available shock absorbers to protect its hard-won social gains," he said.

It added that while prospects in most low-and middle-income countries remain favorable, the ripple effects of the crisis in high-income countries are being felt worldwide.

Already, developing country sovereign spreads have increased 45 basis points on average and gross capital flows to developing countries plunged to $170 billion in the second half of 2011, compared with $309 billion received during the same period in 2010, according to the report.

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