Global Economic Prospects June 2012 warns of long period volatility
Resurgence of Euro Area tensions erode gains made during early 2012
Developing countries should focus on domestic development strategies
June 12, 2012—A positive start to 2012 has been reversed by a resurgence of tensions in the Euro Area, which have eroded almost all of the gains made during the first four months of this year, says the World Bank's latest Global Economic Prospects June 2012, published today.
The world economy is once again in a precarious situation, within months of the sharp deceleration in economic activity seen in the fourth quarter of 2011. The latest bout of tensions is a stark reminder that the after effects of the 2008/09 financial crisis have not played out fully and that volatility and uncertainty are here to stay.
So far, conditions in most developing countries have not deteriorated as much as in the fourth quarter of 2011. Outside of Europe and Central Asia and the Middle-East and North Africa, developing country credit default swap (CDS) rates, a key indicator of market sentiment, remain well below their highs from the fall of 2011.
Nonetheless, developing and high-income country stock markets have lost some 7 percent since May 1st, giving up two-thirds of the gains generated over the preceding four months. Most industrial commodity prices are down, with crude oil and copper prices down by 19 and 14 percent respectively, while developing country currencies have lost value against the US dollar, as international capital fled to safe-haven assets, such as German and U.S. government bonds.
As a result, Global Economic Prospects June 2012 projects that developing country growth will slow to a relatively weak 5.3 percent in 2012, before strengthening somewhat to 5.9 percent in 2013 and 6.0 percent in 2014. Growth in high-income countries will also be weak, 1.4, 1.9 and 2.3 percent for 2012, 2013 and 2014 respectively – with GDP in the Euro Area declining 0.3 percent in 2012. Overall, global GDP is projected to rise 2.5, 3.0 and 3.3 percent for the same period.
The new tensions illustrate that serious risks remain for developing countries during the coming years. In these conditions, policy in developing countries needs to be less reactive to short-term changes in external conditions, and more responsive to medium-term domestic considerations. A return to more neutral macroeconomic policies would also help developing countries reduce their vulnerabilities to external shocks, by rebuilding fiscal space, reducing short-term debt exposures and recreating the kinds of buffers that allowed them to react so resiliently to the 2008/09 crisis.
Growth for the East Asia and Pacific region is on a moderately easing trend, with GDP gains for the region dropping to 8.3 percent in 2011 from 9.7 percent in 2010. Regional growth will moderate further to 7.6 percent in 2012, before a broader global recovery lifts exports and growth in 2013 to 8.1 percent, easing to 7.9 percent in 2014. China’s expansion has slowed, but GDP is expected to advance from 8.2 percent in 2012 to 8.4 percent by 2014.
Developing Europe and Central Asia posted a strong growth of 5.6 percent for 2011, driven by robust domestic demand and good harvests in some countries. However, severe weather conditions in early 2012, capacity constraints in some countries, deleveraging by European banks, and the renewed turmoil in high-income Europe are projected to slow regional GDP growth to 3.3 percent this year, before a modest recovery is expected, with growth firming to 4.1 and 4.4 percent in each of 2013 and 2014.
Growth in the Latin America and the Caribbean region eased to 4.3 percent in 2011, from 6.1 percent in 2010, due to a pronounced slowdown in the region’s larger economies. In Brazil, GDP slowed to 2.7 percent in 2011 (7.5 percent in 2010), as investment growth and private consumption eased. Regional GDP is expected to decelerate to 3.5 percent in 2012, firming to 4.1 percent and 4 percent in 2013 and 2014, respectively, while growth in Brazil is projected at 2.9 percent in 2012, 4.2 percent in 2013 and 3.9 percent in 2014.
Uncertainty, volatility, and political change continue to characterize conditions in the Middle East and North Africa region. Aggregate GDP grew by 1 percent in 2011, down from 3.8 percent in 2010. Regional growth is projected to remain weak at 0.6 percent for 2012, mainly reflecting the influence of sanctions on growth in Iran, and continued GDP declines in Syria and Yemen. As these elements fade in importance, growth for the region should step up to 2.2 percent in 2013 and 3.4 percent in 2014.
Growth in South Asia slowed to 7.1 percent in 2011, from 8.6 percent in 2010, as headwinds from the Euro Area crisis caused a steep deceleration in exports and a reversal of portfolio inflows. Growth in India was particularly weak due to several domestic factors which cut into investment activity. Regional growth will be a modest 6.4 percent in 2012, 6.5 percent in 2013, and 6.7 percent in 2014. India will see growth (measured at factor cost) increasing to 6.9, 7.2 and 7.4 percent in fiscal years 2012-13, 2013-14 and 2014-15, respectively.
Economic growth in Sub-Saharan Africa remained robust in 2011 at 4.7 percent. Excluding South Africa, growth in the rest of the region was stronger, at 5.6 percent. Higher commodity prices and improved macroeconomic and political stability in recent years has supported increased private investment flows to the region. Regional growth is expected to strengthen to 5 percent in 2012, 5.3 percent in 2013 and 5.2 percent in 2014.