The World Bank on Wednesday said a double-dip recession could not be ruled out in some countries if investors lose faith in efforts in Europe and elsewhere to tackle rising debt levels. The World Bank's Global Economic Prospects 2010 report said slower growth in developed economies would deprive developing countries of healthy markets for their goods and would cut into investment.
For the moment, worries that Greece's fiscal woes could spread to other highly-indebted countries, such as Spain and Portugal, has not affected growth in developing countries, the World Bank said.
“If markets lose confidence in the credibility of efforts to put policy on a sustainable path, global growth could be significantly impaired and a double-dip recession could not be excluded,” the report said.
US Federal Reserve Chairman Ben Bernanke, in testimony to lawmakers on Wednesday, said a double-dip recession in the United States could never entirely be ruled out. The Fed has forecast U.S. growth this year of 3% to 4%.
The World Bank called for “significant” fiscal consolidation in advanced economies, adding that simulations conducted by the bank showed that the quicker it happened, the better it would be for developing economies.
The bank also said industrialized countries should seize the opportunities offered by stronger growth in developing countries to boost economic activity.
Still, the report warned that a prolonged period of rising sovereign debt could make credit more expensive and curtail investment and growth in emerging markets.
It said current data suggests that through the end of March the global economic recovery remained robust in most countries, with the exception of Western European nations where it had stagnated.
Euro zone countries have committed to austerity measures to bring their public finances under control, and unveiled a $1 trillion plan to stop the crisis from spreading with the help of the International Monetary Fund.
“The acute phase of the crisis is over and we're now going into a longer term challenge of returning fiscal policy in high-income countries back to a sustainable level,” said World Bank economist Andrew Burns.
“How successful we are in doing that is going to have an important impact in developing countries and in developed countries,” he added.
The World Bank forecast that developing economies would expand at between 5.7% and 6.2% each year from 2010 to 2012 - more than twice the growth rate of advanced economies. This is substantially higher than last year's 1.7%.
But should the crisis in Europe worsen and spread, the World Bank said the pace of growth in developing countries would slow to 6.1 percent this year and 5.7% in 2011,
Advanced economies are projected to expand by between 2.1% and 2.3% in 2010 - not enough to undo the 3.3% contraction they experienced last year - followed by growth of between 1.9% and 2.4% in 2011.
Meanwhile, global growth is likely to expand by 3.3% in 2010 and 2011, rising somewhat after that to 3.5% in 2010, the bank said.
The World Bank said it was concerned that aid flows to the world's poorest countries would fall sharply amid belt-tightening in donor nations. Burns said based on previous crises in developed countries aid flows are likely to fall by between 20% to 25%.
“That would clearly be a very serious situation for low income countries,” Burns said. “It is not our expectation that we will see that sharp a decline, but it is an indicator of the risk that is there.”
Aid can represent as much as 20% of government spending in some developing countries, he noted. (Reuters)