Tuesday, June 12, 2012

Economic outlook volatile and uncertain, says World Bank

Developing countries should prepare for a long period of volatility in the global economy by re-emphasizing medium-term development strategies, while preparing for tougher times, the World Bank has said in a newly-released report.

Recessions & slowdowns

With the effects of recession hitting hard in Europe, other countries, particularly developing countries, are feeling the effects of a slowing of markets.

The Global Economic Prospects (GEP) report says that a resurgence of tensions in high-income Europe has eroded the gains made during the first four months of this year, which saw a rebound in economic activity in both developing and advanced countries, and an easing of risk aversion among investors.

Market jitters

Since 1st May this year, increased market jitters have spread, the World Bank observes. Developing and high-income country stock markets have lost some 7% of their value, giving up two-thirds of the gains generated over the preceding four months. Most industrial commodity prices are down, with crude and copper prices down by 19% and 14%, respectively, while developing country currencies have lost value against the US dollar, as international capital fled to safe-haven assets, such as German and US government bonds.

However, conditions in most developing countries have not deteriorated as much as in the fourth quarter of 2011, the World Bank said. 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 maximums from the fall of 2011.

China & Asia slowing

One area that is beginning to see a sharp change in economic circumstance is China and other parts of Asia. Growth in the East Asia and Pacific region is slowing, partly reflecting an easing of stimulus in China and a shift toward domestic sources of demand. Growth for the region eased to 8.3% in 2011 from 9.7% in 2010.

Slower activity in China, natural disasters - including an earthquake and tsunami in Japan, and flooding in Thailand - and the intensification of the crisis in Europe have each served to temper the pace of growth in the region.

Eurozone turmoil may ease

Nonetheless the World Bank remains positive, saying that the financial turmoil currently gripping the Eurozone may ease, allowing prospects for advanced economies to improve in 2013 to 2014. However, uncertainty regarding oil prices, and still relatively weak demand from the high-income world, coupled with slow growth in China are projected to ease GDP gains in East Asia and the Pacific region to 7.6% in 2012, before rebounding to 8.1% in 2013, and to 7.9% in

Risks ahead

Risks still lie ahead, the World Bank maintains. While China's GDP is expected to accelerate on balance from 8.2% growth in 2012 to 8.4% by 2014, a slowdown may continue for sometime. Production, trade and domestic demand has already slowed over 2011 to 2012, a response, in part, to earlier policy targeted at slowing certain segments of the economy.

But financial conditions in high-income Europe, higher oil prices, and a slowdown in China would pose the largest risks to the overall outlook. The Eurozone remains particularly volatile, and although financial developments in region calmed in the first four months of 2012, tensions have revived in May. While a gradual improvement of conditions remains the most likely outcome, the World Bank suggests, a serious deterioration of conditions in Europe is a possibility.


In such a scenario, growth in East Asia and the Pacific could slow by as much as 2% to 4% due to reduced import demand, tighter international capital conditions and increased precautionary savings abroad and within the region.

Such a scenario would affect many countries which are heavily reliant on remittances, such as Fiji, the Philippines and Vietnam, those dependent on tourism including Cambodia, Fiji, Malaysia, Thailand and Vietnam, and economies reliant on commodities such as Indonesia, Malaysia
and Thailand.

A more rapid than expected slowdown in China poses an external risk for the rest of the region. A slowdown in China would spill-over into the rest of the region in the form of reduced demand for exports, and commodity dependent countries would be especially at risk of a slowdown in China's investment.

Financial medicine

Hans Timmer, Director of Development Prospects at the World Bank, says that countries, particularly developing economies, should concentrate on "productivity-enhancing reforms" rather than focusing on "day-to-day" developments.

"Global capital market and investor sentiment are likely to remain volatile over the medium term – making economic policy setting difficult. In this environment, developing countries should focus on productivity-enhancing reforms and infrastructure investment instead of reacting to day-to-day changes in the international environment," Timmer says.

But with bad news reported almost daily concerning the Euro-crisis, China's slowdown, and concerns over global economic stability, it may be difficult for more vulnerable economies to make long term plans. Making panic decisions and rushing to judgement may not be the best course of action.

tvnewswatch, London, UK

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