Global credit turmoil, an economic slowdown in industrial countries and accelerating inflation are set to curb the rapid pace of growth in developing economies this year, the World Bank said on Tuesday. The economic cooling may be welcome relief to countries where economic overheating had become a major concern, the bank said in its annual review of global financial conditions in the developing world.
Still, the World Bank said the outlook was uncertain and global economic conditions could worsen if the financial turmoil and slowdown, brought on by problems in the US housing market, becomes more severe and prolonged.
Until recently, institutions like the World Bank and the International Monetary Fund said developing countries may go unscathed by the financial crisis that has rocked major banks in the United States and Europe. "More than at any other time in recent years, the uncertainty surrounding the outlook is quite pronounced and tilted to the downside," the Bank said.
The Bank's Global Development Finance report said the deceleration in growth in developing countries would be across most regions, with the largest declines in East Asia and the Pacific, and Latin America. The slowdown in East Asia will mostly be in China where growth is expected to fall by 2.5 percentage points to 9.2 percent in 2009, and 9.0 percent in 2010.
In contrast, growth in Sub-Saharan Africa is likely to pick up in 2008, reaching 6.5 percent - the highest rate in 38 years - then fall to 5.9 percent by 2010, which is still above the average over the past five years.
A major worry, the World Bank said, was the doubling of prices of food staples since 2005, fuelled mainly by rising demand for food and biofuels. Inflationary pressures in the developing world, driven by record food and fuel prices, are complicating policy efforts to ward off broader effects from the slowdown and financial turmoil, it said.
"Across the developing world, inflationary pressures complicate the role that monetary and fiscal policy can play in maintaining macroeconomic stability over the medium term," the World Bank said.
"Striking the appropriate balance will vary from country to country, but in general policy makers need to recognise the limitations of activist measures." The Bank said countries that undertake prudent fiscal planning and use monetary policy instruments to effectively maintain price stability will be better placed to sustain growth over the long term.
The World Bank said growth this year in the industrial world would slow to 2.7 percent from 3.7 percent in 2007. In developing countries, growth in 2008 is set to ease to 6.5 percent from 7.8 percent in 2007, which is still above trend for the past decade. The slowdown could be harsher in developing countries that depend on foreign capital flows, as credit market problems prompt a tightening in lending conditions.
The World Bank said the downturn in developed markets should be relatively short-lived and it forecast a pickup in 2009 and a full recovery by 2010. The Bank said external financial positions in two-thirds of the developing world had weakened since the onset of the financial turmoil in mid-2007, with the exception of China and major oil exporters Algeria, Iran, Russia and Venezuela.
It said half the developing countries ran current account deficits in excess of 5 percent of gross domestic product in 2007, but many kept piling up foreign exchange reserves, with most of the increase in Brazil, Russia, India and China. Countries with large current account deficits and heavy external financing needs are particularly vulnerable to an abrupt downturn in the credit cycle, the Bank said. Among these are countries in Eastern Europe and Central Asia, it added. It also warned that a weaker US dollar could increase uncertainty in the international trading system and fuel inflationary expectations, pushing commodity prices higher.