Countries warned of volatility in global economy

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Pretoria – Developing countries should prepare for a long period of volatility in the global economy, the World Bank has warned.

These countries should boost their medium-term development strategies while preparing for tougher times, said the bank in its Global Economic Prospects (GEP) June 2012 report released on Tuesday.

According to the report a resurgence of tensions in high-income Europe has eroded the gains made in the first four months of the year which resulted in a rebound in economic activity in both developing and advanced countries.

Developing country currencies have lost value against the US dollar as international capital fled to safe-haven assets like German and US government bonds.

Overall global GDP is projected to be 2.5% in 2012, 3% in 2013 and 3.3% in 2014. The bank projects a “relatively weak” growth of 5.3% will be seen by developing countries in 2012 before strengthening somewhat to 5.9% in 2013 and 6% in 2014.

Growth in high income countries will be weak at 1.4% in 2012, 1.9% in 2013 and 2.3% in 2014.

The report further noted that should the situation in Europe deteriorate sharply no developing region would be spared.

Developing countries in Europe and central Asia are especially vulnerable due to its close trade and financial ties with high income Europe but the world’s poorest countries will feel the fall-out. This is especially for countries that are heavily reliant on remittances, tourism or commodity exports or those that have high-levels of short term debt.

“Where possible developing countries need to move to reduce vulnerabilities by lowering short-term debt levels, cutting budget deficits and returning to a more neutral monetary policy stance. Doing so will provide them with more leeway to loosen policy should global conditions take a sharp turn for the worse,” lead author of the report and manager of macroeconomics Andrew Burns said.

Economic growth in Sub-Saharan Africa was robust in 2011 at 4.7%. “Excluding South Africa, growth in the rest of the region was stronger at 5.6%, making it one of the fastest growing developing regions,” noted the report. Regional growth is expected to strengthen to 5% in 2012, 5.3% in 2013 and 5.2% in 2014.

Growth in South Asia is expected to reach a modest 6.4% in 2012, 6.5% in 2013 and 6.7% in 2014.

“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,” said Hans Timmer, Director of Development Prospects at the World Bank.

The report is released twice a year. It examines growth trends for the global economy and how they affect developing countries.

Source: BuaNews – Press Release – 13 June 2012