Developing world ‘should protect against global volatility’

13 Jun 12
Developing countries should prepare for a long period of volatility in the global economy by cutting budget deficits and reducing short-term debt, the World Bank said yesterday.

By Nick Mann | 13 June 2012

Developing countries should prepare for a long period of volatility in the global economy by cutting budget deficits and reducing short-term debt, the World Bank said yesterday.

‘Jitters’ in the eurozone since the start of May have called into question the marked improvement in market sentiment and recovery in economic activity seen in both advanced and developing economies in early 2012, according to the Bank’s Global economic prospects report.

Developing and high-income country stock markets have lost 7% of their value since the start of last month, prices for most industrial commodities have fallen and developing country currencies have lost value against the US dollar.

Although economic conditions in most developing countries have not deteriorated by as much as they did in the final quarter of 2011, increased uncertainty in the global economy will add to problems from budget cutting and banks cutting back on loans. Many of the larger and faster-growing economies are also close to or above their growth potential, the World Bank said.

It now expects developing countries to record 5.3% gross domestic product growth this year, compared with 6.1% in 2011 and 7.4% in 2010. This will strengthen to 5.9% in 2013 and 6% in 2014.

Growth in high-income countries is now forecast at 1.4% this year, compared with 1.6% in 2011 and 3% in 2010. A slight improvement to 1.9% is expected next year, and then further improvements to 2.3% in 2014.

As a whole, the global economy is now expected to grow by 2.5% this year, 3% in 2013 and 3.3% in 2014.

The World Bank warned, however, that any sharp deterioration in the eurozone situation would affect all developing regions. Those in Europe and Central Asia are most vulnerable because of their close trade and financial ties with high-income Europe. However, the world’s poorest countries will also be affected, especially if they rely on tourism or commodity exports or have high-levels of short-term debt.

Andrew Burns, manager of Global Macroeconomics and lead author of the report, said: ‘Where possible, developing countries need to move to reduce vulnerabilities by lowering short-term debt levels, cutting budget deficits and returning to a more neutral monetary policy stance.

‘Doing so will provide them with more leeway to loosen policy, should global conditions take a sharp turn for the worse,’ he added.

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