The World Bank warned developing countries today to prepare for the real risk that an escalation in the Euro area debt crisis could tip the world into a slump on a par with the global downturn in 2008/09.
In a report sharply cutting its world economic growth expectations, the World Bank said Europe was probably already in recession. If the euro area debt crisis deepened, global economic forecasts would be significantly lower.
The sovereign debt crisis in the Euro zone appears to be contained, Justin Lin, the chief economist for the World Bank, told reporters in Beijing on Wednesday.
However, the risk of a global freezing-up of the markets and as well as a global crisis similar to what happened in September 2008 are real.
The World Bank predicted world economic growth of 2.5% in 2012 and 3.1% in 2013, well below the 3.6% growth for each year projected in June.
We think it is now important to think through not only slower growth but sharp deteriorations, as a prudent measure, said Hans Timmer, director of development prospects at the bank.
The World Bank said if the Euro area debt crisis escalates, global growth would be about 4 percentage points lower.
It forecast high-income economies would expand just 1.4% in 2012 as the Euro area shrinks 0.3%, sharp downward revisions from growth forecasts last June of 2.7% and 1.8%, respectively.
It cut its forecast for growth in developing economies to 5.4% for 2012 from its previous forecast of 6.2%, saying expansion in Brazil and India and to a lesser extent Russia, South Africa and Turkey, had slowed already.
It saw a slight pick up in growth in developing economies in 2013 to 6%. But the report said threats to growth are still rising, suggesting the outlook remained highly uncertain.
The downturn in Europe and weaker growth in developing countries raises the risk that the two developments reinforce one another, resulting in an even weaker outcome, it said.
It also cited failure so far to resolve high debts and deficits in Japan and the United States and slow growth in other high-income countries, and cautioned those could trigger sudden shocks.
On top of that, political tensions in the Middle East and North Africa could disrupt oil supplies and add another blow to global prospects.
On balance, the World Bank said global economic conditions were fragile and there remains great uncertainty as to how markets will evolve over the medium term.
Against that backdrop, it said developing countries were even more vulnerable than they were in 2008 because they could find themselves facing reduced capital flows and softer trade.
In addition, many developing countries have weaker finances and wouldn't be able to respond to a new crisis as vigorously.
China's growth – forecast in the report at 8.4% in 2012 – could help bolster imports and gives it big fiscal space to respond to changing conditions, Lin said.
No country and no region will escape the consequences of a serious downturn, the World Bank said, adding that now was the time for developing countries to plan how to soften the impact of a potential deep crisis.
A serious crisis would manifest itself in not just reduced trade flows, but also reversal of capital flows, making it hard for countries, especially in Eastern Europe and Latin America, who have debt coming due.