The World Bank: Second global financial crisis 'looming'
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Jan 18, 2012, 2:23:34 AM1/18/12
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Perilous
Times
The World Bank: Second global financial crisis 'looming'
By Veronica Smith
AFP
January 18, 2012 2:44PM
World Bank slashes global economic forecast
High income countries have too much debt
"The world could be thrown in a recession"
The World Bank has warned that rich nations' debt problems may yet
reap a crisis that would eclipse the tumult of 2008. Picture: File
THE world's leading economists have warned of a new financial
crisis that will cause even more damage than the GFC in 2008.
The World Bank has slashed its global economic forecasts because
of the high levels of debt in rich nations.
The Washington-based lender had previously projected a 3.6 per
cent annual global growth for the next two years.
But this has been drastically reduced to 2.5 per cent in 2012 and
3.1 per cent in 2013.
"The world economy has entered a very difficult phase
characterised by significant downside risks and fragility," the
twice-yearly Global Economic Prospects report said.
While financial turmoil appeared contained at the moment, "the
risk of a much broader freezing up of capital markets and a global
crisis similar in magnitude to the Lehman crisis remains".
High-income countries cannot count on the willingness of markets
to finance their deficits and maturing debt, it warned.
If shunned by the markets, a much wider financial crisis could
sweep private banks and financial institutions on both sides of
the Atlantic.
"The world could be thrown in a recession as large or even larger
than that of 2008/09."
Only partly recovered from that global slump, both high-income and
developing countries require bolstering to withstand the impending
slowdown, the World Bank said.
"In the event of a major crisis" countries could be forced to cut
spending, which would further deepen the negative cycle.
Financial turmoil in both developing and high-income countries has
slammed the brakes on global growth despite relatively strong
activity in the United States and Japan, it said.
The global economy grew at an estimated 2.7 per cent rate in 2011,
according to World Bank figures.
In addition, growth in several major developing countries,
particularly Brazil and India, has slowed in part because of
domestic policy tightening.
"Developing countries need to evaluate their vulnerabilities and
prepare for further shocks, while there is still time," said
Justin Lin, the World Bank's chief economist.
Developing country growth was revised down to 5.4 per cent from
6.2 per cent in the June projections.
High-income countries were expected to grow a tepid 1.4 per cent
this year, weighed down by a 0.3 per cent contraction in the
17-nation eurozone.
World trade also was slowing sharply, with growth seen at only 4.7
per cent for this year compared with an estimated 6.6 per cent in
2011.
But the World Bank warned that even achieving these much weaker
outcomes was "very uncertain", considering the risks.
"The downturn in Europe and weaker growth in developing countries
raises the risk that the two developments reinforce on another,
resulting in an even weaker outcome."
It also noted that oil supplies could be disrupted amid potential
political tensions in the Middle East and North Africa.
High deficits and debts in the US and Japan, as well as a
slow-trend growth in gross domestic product (GDP), or economic
output, in other high-income countries, "could trigger sudden
adverse shocks".
The World Bank projected the United States, the world's largest
economy, would grow 2.2 per cent this year as it slowly recovers
from the Great Recession.
Japan would emerge from last year's recession with GDP growth of
1.9 per cent in 2012.
China again would be the planet's growth engine, although at a
slower pace of 8.4 per cent this year, compared with an estimated
9.1 per cent jump in 2011.
Capital flows to developing countries have shrunk by almost half
compared with 2010, it said, calling on them to "prepare for the
worst".
The 30 developing countries with financing needs that exceed 10
per cent of GDP should seek to refinance those needs "now", the
Bank said.
It also recommended prioritising social safety net and
infrastructure programs that are key to longer-term growth.
Noting a recent decline in commodity prices had eased inflation in
most developing countries, the bank said that nonetheless "food
security for the poorest, including in the Horn of Africa, remains
a central concern".