Global Economic Prospects: Uncertainties and
vulnerabilities
January 2012
Page 1 of 4
Executive Summary
The world economy has
entered a dangerous period. Some of the financial turmoil in Europe has spread
to developing and other high-income countries, which until earlier had been
unaffected.
This contagion has
pushed up borrowing costs in many parts of the world, and pushed down stock
markets, while capital flows to developing countries have fallen sharply.
Europe appears to have entered recession.
At the same time,
growth in several major developing countries (Brazil, India and, to a lesser
extent, Russia, South Africa and Turkey) is significantly slower than it was
earlier in the recovery, mainly reflecting
policy tightening initiated in late 2010 and early 2011 in order to
combat rising inflationary pressures. As a result, and despite a strengthening
of activity in the United States and Japan, global growth and world trade have
slowed sharply.
In this context,
prospects are very uncertain…Indeed, the world finds itself, in January 2012,
living a version of the downside scenarios discussed as a risk just 6 months
ago when the June edition of Global Economic Prospects (GEP) was released. As a
result, forecasts have been significantly downgraded in this edition of GEP.
The global economy is now expected to expand 2.5 and 3.1 percent in 2012 and
2013 (3.4 and 4percent when calculated using purchasing power parity weights),
versus the 3.6 percent projected in June for both years.
High-income country
growth is now expected to come in at 1.4 percent in 2012 (-0.3 percent for Euro
Area countries, and 2.1 percent for the remainder) and 2 percent in 2013,
versus a June forecast of 2.7 and 2.6 percent for 2012 and 2013 respectively.
Developing country
growth has been revised down to 5.4 and 6 percent versus 6.2 and 6.3 percent in
June.
Reflecting the
growth slowdown, world trade, which expanded by an estimated 6.6 percent in
2011, will grow only 4.7 percent in 2012, before strengthening to 6.8 percent
in 2013.
However, even
achieving these much weaker outturns is very uncertain. The downturn in Europe
and the slow growth in developing countries could reinforce one another more
than is anticipated in the base line scenario, resulting in even weaker
outturns and further complicating efforts to restore market confidence.
Meanwhile, the
medium-term challenge represented by high debts and slow trend growth in other
high income countries has not been resolved and could trigger sudden adverse
shocks. Additional risks to the outlook include the possibility that political
tensions in the Middle East and North Africa disrupt oil supply, and the
possibility of a hard landing in one or more important middle-income countries.
While the situation in
high-income Europe is contained for the moment, if the crisis expands and
markets deny financing to several additional European economies, outturns could
be much worse, with global GDP more than 4 percent lower than in the baseline.
Although such a crisis, should it occur, would be centered in Europe, developing countries would feel its
effects deeply, with developing country
GDP
declining by 4.2
percent by 2013.
In the event of a
major crisis, the downturn may well be longer than in 2008/09 because
high-income countries do not have the fiscal or monetary resources to bail out
the banking system or stimulate demand to the same extent as in 2008/09.
Although developing countries have some maneuverability on the monetary side,
they could be forced to pro-cyclically cut spending – especially if financing for fiscaldeficits
dries up. Global Economic Prospects: Uncertainties and vulnerabilities
January 2012
Page 2 of 4
Contagion spreads to
developing countries…
The heightened market
volatility since August 2011 has differed qualitatively from earlier ones
because this time the credit default swaps (CDS) spreads have increased by an
average of 117 basis points (bps) between the end of July 2011 and early
January 2012, as did those of almost all Euro Area countries, including France
and Germany, and those of non-Euro Area countries, such as the United Kingdom.
For developing
countries, the contagion has been broadly based. In addition to higher bond
spreads and CDS rates, developing-country stock markets have lost 8.5 percent
of their value since July-end. This, combined with the 4.2 percent drop in
high-income stock-market valuations, has translated into $6.5trillion, or 9.5
percent of global GDP, in wealth losses.
Perhaps more
importantly, capital flows to developing countries have
weakened sharply as investors withdrew substantial sums from
developing-country markets in the second half of the year. Overall, gross
capital flows to developing countries plunged to $170 billion in the second
half of 2011, only 55 percent of the $309 billion received during the like period
of 2010. Equity issuance plummeted 80 percent to $25 billion with exceptionally
weak flows to China and Brazil accounting for much of the decline. Bond
issuance almost halved
to $55 billion, due to a large fall-off
in East Asia and emerging Europe.
The decline in syndicated bank loans was much less marked, largely because such
activity remained very depressed following the 2008/09 crisis.
The real-side effects
of the post-August turmoil are somewhat difficult to discern, in part
because the slowing of industrial
production growth in several large middle-income countries preceded the
resurgence of financial tensions in August. Indeed, activity in Europe and
Central Asia, the United States and Japan has accelerated since August. Trade
data, on the other hand, suggests a clearer impact from the post August turmoil
and weakness in Europe.
Global trade volumes
declined at an annualized pace of 8
percent during the three months ending October 2011, mainly reflecting a 17
percent annualized decline in European imports. Developing-country exports
declined at a 1.3 percent annualized pace in the third quarter of 2011 and have
continued to decline through November, with the sharpest contractions in South
Asia (following very rapid export growth in the first half of the year).
Exports from East Asia have also been falling at double-digit annualized rates,
in part because of disruptions to supply chains caused by the
Flooding in Thailand.
Developing countries
are more vulnerable than in 2008…
Whatever the actual
outcomes for the world economy in 2012 and 2013, several factors are clear.
First, growth in high-income countries is going to be weak as they struggle to
repair damaged financial sectors and badly stretched fiscal balance sheets.
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.
One of the most
positive elements of the recession of 2008/09 was the speed with which
developing countries (other than those in Central and Eastern Europe) exited
the crisis. By 2010, 53 percent of developing countries had regained levels of
activity close to, or even above, estimates of their potential output. This
time, developing countries look to be more vulnerable if there is a sharp
deterioration in global conditions.
Even though fiscal conditions are still generally better
in developing countries than in high-income countries, government balances have
deteriorated by two or more percent of GDP in almost 44 percent of
developing countries
and some 27 developing countries have government deficits of 5 or more percent
of Global Economic Prospects: Uncertainties and vulnerabilities
January 2012
Page 3 of 4
GDP in 2012. As a result,
developing countries have much less fiscal space available to respond to a new
crisis.
Should conditions in
high-income countries deteriorate and a second global crisis materializes,
developing countries will find themselves operating with much less abundant
capital, less vibrant trade opportunities and weaker financial support for both
private and public activity. Under these conditions, prospects and growth rates
that seemed relatively easy to achieve during the first decade of this millennium
may become much more difficult to attain in the second, and vulnerabilities
that remained hidden during the boom period may become visible and require
policy action.
In this highly
uncertain environment, developing countries should evaluate their
vulnerabilities and prepare contingencies to deal with a downturn.
• If global financial
markets freeze up, governments and firms may be unable to finance growing
deficits. Countries should engage in contingency planning, prioritizing social
safety nets and infrastructure spending to assure longer-term growth. Problems
are likely to be particularly acute for developing countries with external
financing needs that exceed 5 percent of GDP. Where possible, they should
pre-finance to avoid abrupt cuts in government and private sector spending.
• A renewed financial
crisis could accelerate the ongoing financial-sector deleveraging process. Several
countries in Eastern Europe and Central Asia, reliant on high-income European
banks, are particularly vulnerable to a sharp reduction in wholesale funding
and domestic bank activity.
Deleveraging of banks
in high-income countries could result in a forced sell-off of foreign
subsidiaries, and affect valuations of foreign and domestically-owned banks in
countries with large foreign presences. And slower growth and deteriorating
asset prices could rapidly increase nonperforming loans throughout the
developing world. To prevent domestic banking crises, countries should engage
in stress testing of their domestic banking sectors.
• A severe crisis in
high-income countries could put pressure on the balance of payments and
government accounts of countries heavily reliant on commodity exports and
remittance inflows. A severe crisis could cause remittances to developing
countries to decline by 6 or more percent, with particularly acute impacts
among the 24 countries where remittances represent 10 or more percent of
GDP. Oil and metal
exporting countries would also be affected in a major crisis. The fiscal
balances of major oil and metal exporters could deteriorate by 4 or more
percent of GDP. Although lower food prices would reduce incomes of producers
(partially offset by lower oil and fertilizer prices), it would benefit
consumers. Global Economic Prospects: Uncertainties and vulnerabilities
January 2012
2009
2010 2011e
2012f 2013f
Global Conditions
World Trade Volume
(GNFS) -10.6
12.4 6.6
4.7 6.8
Commodity Prices (USD
terms)
Non-oil commodities -22.0 22.4 20.7
-9.3 -3.3
Oil price $.bbl 61.8
79.0 104.0
98.2 97.1
International capital
flows to developing countries (% of GDP)
Developing countries
Net private and
official inflows 4.2
5.8
4.5
Net private inflows
(equity + debt) 3.7 5.4 4.3 3.3
3.7
East Asia and Pacific 3.7
6.0 4.7
3.4 3.7
Europe and Central
Asia
2.7 5.0 3.6 2.0 2.9
Latin America and
Caribbean 3.9
6.0 4.8
4.1 4.3
Middle East and N.
Africa 2.8
2.4 2.0
1.2 1.6
South Asia 4.6
5.0 3.9
3.3 3.7
Sub-Saharan Africa 4.0
3.7 3.9
3.5 4.4
Real GDP growth
5 World
-2.3 4.1 2.7
2.5 3.1
Memo item: World (PPP
weights) -0.9 5.0 3.7 3.4 4.0
High income -3.7
3.0 1.6
1.4 2.0
Euro Area -4.2
1.7 1.6
-0.3 1.1
Japan -5.5
4.5 -0.9
1.9 1.6
United States -3.5
3.0 1.7
2.2 2.4
Developing countries 2.0
7.3 6.0 5.4 6.0
East Asia and Pacific 7.5
9.7
8.2 7.8 7.8
Europe and Central
Asia -6.5
5.2 5.3
3.2 4.0
Latin America and
Caribbean
-2.0 6.0 4.2 3.6 4.2
Middle East and N.
Africa 4.0
3.6 1.7 2.3 3.2
South Asia 6.1 9.1 6.6
5.8 7.1
Sub-Saharan Africa 2.0
4.8
4.9 5.3 5.6
Table 1.1 The global
outlook in summary
(percentage change
from previous year, except interest rates and oil price)
Source: World Bank.
Notes: PPP =
purchasing power parity; e = estimate; f = forecast.
1. Simple average of
Dubai, Brent and West Texas Intermediate.
2. Aggregate growth
rates calculated using constant 2005 dollars GDP weights.
3. Calculated using
2005 PPP w
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