World Bank Expects Steady Global Growth in 2011

The world economy is moving from a post-crisis bounce-back phase of the recovery to slower but still solid growth this year and next, with developing countries contributing almost half of global growth, says the World Bank’s latest Global Economic Prospects 2011.

 

The World Bank estimates that global GDP, which expanded by 3.9% in 2010, will slow to 3.3% in 2011, before it reaches 3.6% in 2012.

 

Developing countries are expected to grow 7% in 2010, 6% in 2011 and 6.1% in 2012. They will continue to outstrip growth in high-income countries, which is projected at 2.8% in 2010, 2.4% in 2011 and 2.7% in 2012.

 

In most developing countries, GDP has regained levels that would have prevailed had there been no boom-bust cycle. While steady growth is projected through 2012, the recovery in several economies in emerging Europe and Central Asia and in some high-income countries is tentative.

 

Without corrective domestic policies, high household debt and unemployment, and weak housing and banking sectors are likely to mute the recovery.

 

“On the upside, strong developing-country domestic demand growth is leading the world economy, yet persistent financial sector problems in some high-income countries are still a threat to growth and require urgent policy actions,” says Justin Yifu Lin, the World Bank’s chief economist and senior vice president for development economics.

 

Net international equity and bond flows to developing countries rose sharply in 2010, rising by 42% and 30% respectively, with nine countries receiving the bulk of the increase in inflows. Foreign direct investment to developing countries rose a more modest 16% in 2010, reaching $410 billion after falling 40% in 2009. An important part of the rebound is due to rising South-South investments, particularly originating in Asia.

 

“The pickup in international capital flows reinforced the recovery in most developing countries,” says Hans Timmer, director of development prospects at the World Bank. “However, heavy inflows to certain big middle-income economies may carry risks and threaten medium-term recovery, especially if currency values rise suddenly or if asset bubbles emerge.”

 

Most low-income countries saw trade gains in 2010 and, overall, their GDP rose 5.3% in 2010. This was supported by a pick-up in commodity prices, and to a lesser extent in remittances and tourism. Their prospects are projected to strengthen even more, with growth of 6.5% in both 2011 and 2012, respectively.

 

According to the report, current relatively high food prices are having a mixed impact. In many economies, dollar depreciation, improved local conditions, and rising prices for goods and services means that the real price of food has not risen as much as the U.S. dollar price of internationally traded food commodities.

 

“However, double-digit price increases of key staples in the past few months are pressuring households in countries with an already-existing high burden of poverty and malnutrition. And, if global food prices rise further along with other key commodities, a repeat of the conditions in 2008 cannot be excluded,” cautions Andrew Burns, manager of Global Macroeconomics in the World Bank’s Prospects Group.

 

Regional Highlights

 

East Asia and Pacific, with GDP growth estimated at 9.3% for 2010, led the global recovery. This was on the back of an estimated 10% increase in Chinese GDP and a 35% increase in its imports. Output growth in the rest of the region was also strong at 6.8%. Loose monetary policy in high-income countries boosted capital inflows, with the Thai and Indonesian equity markets up more than 40% since January 2010. The inflows have appreciated regional currencies, despite offsetting measures like reserve accumulation and other adjustments. As the pace of the global recovery eases, GDP growth is projected to slow, but remain strong at 8% in 2011 and 7.8% in 2012.

 

The South Asia region is projected to post GDP growth of 7.9% on average over the 2011-2012 fiscal years, buoyed by vibrant growth in India. This compares with estimated growth of 8.7% in fiscal year 2010. The region benefited from aggressive demand stimulus measures, a revival in investor and consumer sentiment, and a resumption of capital inflows. A recent move toward tighter policy will likely need to be pursued further, given the region’s high fiscal deficits (the largest among developing regions), high inflation and deteriorating current accounts.

 

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