Global Economic Prospects 2010: The global economic recovery that is now underway will slow later this year as the impact of fiscal stimulus wanes, according to a new report from the World Bank. Financial markets remain troubled and private sector demand lags amid high unemployment. The report predicts that the fallout from the crisis will change the landscape for finance and growth over the next 10 years.

Global Economic Prospects 2010 (pdf file), released today in Bangkok, warns that while the worst of the financial crisis may be over, the global recovery is fragile.

Global GDP, which declined by 2.2 percent in 2009, is expected to grow 2.7 percent this year and 3.2 percent in 2011. Prospects for developing countries are for a relatively robust recovery, growing 5.2 percent this year and 5.8 percent in 2011 -- up from 1.2 percent in 2009. GDP in rich countries, which declined by 3.3 percent in 2009, is expected to increase much less quickly—by 1.8 and 2.3 percent in 2010 and 2011. World trade volumes, which fell by a staggering 14.4 percent in 2009, are projected to expand by 4.3 and 6.2 percent this year and in 2011.

The World Bank says while this is the most likely scenario, considerable uncertainty continues to cloud the outlook. Depending on consumer and business confidence in the next few quarters and the timing of fiscal and monetary stimulus withdrawal, growth in 2011 could be as low as 2.5 percent and as high as 3.4 percent.

“Unfortunately, we cannot expect an overnight recovery from this deep and painful crisis, because it will take many years for economies and jobs to be rebuilt. The toll on the poor will be very real,” said Justin Lin, World Bank Chief Economist and Senior Vice President, Development Economics. “The poorest countries, those that rely on grants or subsidized lending, may require an additional $35-50 billion in funding just to sustain pre-crisis social programs.”

This year’s Global Economic Prospects examines the consequences of the crisis for both the short- and medium-term growth prospects of developing countries. It concludes that the crisis and the regulatory reaction to the financial excesses of the preceding several years
may have lasting impacts on financial markets, raising borrowing costs and lowering levels of credit and international capital flows. As a result, trend growth in developing countries may be reduced by between 0.2 and 0.7 percentage points annually over the next five to seven years as economies adjust to tighter financial conditions. Overall, potential output in developing countries could be reduced by between 3.4 and 8 percent over the long run, compared with its precrisis path.

The report further finds that the very liquid conditions of the first half of the decade contributed to the expansion in credit available in developing countries and that this expansion was responsible for about 40 percent of the approximately 1.5 percentage point acceleration of the pace at which many developing-country economies could grow without generating significant inflation.

Terraced fields, Bhutan. Photo: Curt Carnemark / World Bank

Regional trends at a glance

The report says East Asia and the Pacific region led the rebound in the global economy last year, reflecting robust fiscal policy steps and strong domestic demand. China, with 8.4 percent growth last year, was an engine for regional growth, a pattern expected to continue this year, with Chinese GDP projected to grow 9 percent. GDP in the region is estimated to have increased 6.8 percent in 2009 and is forecast to edge up 8.1 percent this year. Capital flows to the region are returning and local financial market developments have provided further impetus to the recovery. Continuing excess capacity in manufacturing and only moderate advances in world trade growth will restrain GDP growth from accelerating much faster than 8.2 percent in 2011.

Reflecting pre-existing vulnerabilities in many countries (in particular current account deficits arising from large private sector savings-investment imbalances), developing Europe and Central Asia was hardest hit by the crisis, with GDP falling by an estimated 6.2 percent in 2009. Although GDP is projected to rise by 2.7 percent in 2010 and 3.6 percent in 2011, growth rates in most economies will remain below potential and unemployment and bank restructuring will continue to be pervasive. Much higher non-performing loans, higher interest rates and weak international capital flows will remain key challenges in the near term. Compared to the pre-crisis period, high non-performing loans, weak public finances and low international capital flows are likely to dampen investment growth in many countries. Moreover, significant downside risks persist, including the possibility of a double-dip recession or increased financial difficulties for banks in the region. Despite better international financing conditions and domestic adjustments, the region’s external financing needs are expected to exceed inflows by as much as $54 billion in 2010.

Stronger fundamentals helped the Latin America and the Caribbean region weather this crisis much better than in the past. Following an estimated 2.6 percent drop in GDP last year, regional output is projected to increase by 3.1 percent in 2010 and 3.6 percent in 2011, but weaker investment will keep growth from attaining boom year levels. Remittances and to some extent tourism (both important sources of external finance for Caribbean countries) are expected to recover only modestly in the 2010–11 period, undermined by weak labor market conditions in the United States and other high-income countries. Key challenges include the winding down of stimulus measures; providing for the unemployed in a fiscally sustainable manner; and maintaining openness towards international trade and investment.

The report says the Middle East and North Africa region was less sharply impacted by the crisis than other regions, with overall GDP growth slowing to 2.9 percent in 2009. Growth among oil-importing developing countries was an estimated 4.7 percent in 2009. Among developing oil-exporters, growth eased to 1.6 percent, reflecting production restraint and reduced oil revenues. For the region as a whole, GDP is projected to grow 3.7 percent in 2010 and 4.4 percent by 2011.

The forecast for recovery is premised on a revival in global oil demand, stabilizing oil prices and a rebound in key export markets. Despite a gradual withdrawal of fiscal stimulus measures, moderate advances in consumer and capital spending are expected to underpin firmer growth.

The World Bank says South Asia appears to have escaped the worst effects of the crisis. Nevertheless, its estimated 5.7 percent GDP growth in 2009 (the same growth rate as in 2008) represents a marked deceleration from the boom period, largely driven by a pronounced fall-off in investment growth. Private capital inflows—a key transmission channel of the crisis—are less significant as a share of South Asia’s GDP (particularly foreign direct investment), compared with most other regions.

Also, domestic demand in the region was relatively resilient, having been cushioned by counter-cyclical macroeconomic policies. Growth is expected to rebound to 6.9 and 7.4 percent in 2010 and 2011.

Children at school in Romania. Photo: Flore de Préneuf © World Bank

Sub Saharan Africa was also hard hit. It initially felt the crisis through trade, foreign direct investment, tourism, remittances, and official assistance channels. The World Bank says regional GDP is estimated to have increased by only 1.1 percent last year. Oil exporters and middle income countries were hit more severely than low-income, fragile and less integrated countries – at least initially. In 2010 GDP is expected to grow by 4.8 percent in Sub-Saharan African countries excluding South Africa, with growth of 4.2 percent in fragile countries and 4.8 percent in low-income countries. South Africa is expected to grow by 2 percent this year after having contracted by 1.8 percent in 2009, while middle-income countries growth will accelerate to 3.5 percent. The overall regional outlook remains uncertain and the strength of the recovery will largely depend on demand from key export markets.