World Bank's crisis warning

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This was published 12 years ago

World Bank's crisis warning

By Peter Martin

The World Bank says the global economy is on the edge of a new financial crisis, deeper and more damaging than the one that followed the collapse of Lehman Brothers in 2008.

Its latest six-monthly assessment of global economic prospects halves its forecast for growth among high-income countries, and pushes its forecast for countries using the euro into negative territory.

The World Bank sees a risk of a ‘much broader freezing up of capital markets’.

The World Bank sees a risk of a ‘much broader freezing up of capital markets’.

It has slashed its global growth forecast for 2012 from 3.6 per cent to 2.5 per cent. High-income nations are forecast to grow at 1.4 per cent rather than 2.7 per cent. The euro area's economy will shrink 0.3 per cent.

Contact the reporter: peter.martin@fairfaxmedia.com.au

However, the bank warns "even achieving these much weaker outcomes is very 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."

Although contained for the moment, there is a risk of a "much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis".

In the event of such a crisis, "activity is unlikely to bounce back as quickly as it did in 2008/09, in part because high-income countries will not have the fiscal resources to launch as strong a countercyclical policy response or to offer the same level of support to troubled financial institutions".

Responding to the report, acting treasurer Bill Shorten said there was no doubt Australia faced "a tough year ahead".

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"But in the face of these major threats, Australians can be confident in our strong economic fundamentals.

"The Australian economy is now around 7 per cent larger than it was prior to the global financial crisis and the global recession. By way of comparison, the United States is just back to – or above – where it was prior to the crisis.

"We have a proven track record, having fought off the global recession and the worst the world can throw at us."

Outlooks cut

Among the changes, the World Bank now expects the US to expand 2.2 per cent in its presidential election year, down from an earlier forecast of 2.9 per cent.

Australia's two biggest export markets will also have slower growth. China's economy will expand 8.4 per cent this year, slower than the 9.2 per cent growth rate reported yesterday for 2011. That forecast, though, is unchanged from the World Bank's November update.

Japan's economy will grow 1.9 per cent in 2012, down from the 2.6 per cent pace predicted by the bank in June.

India, one of Australia's fastest growing markets, will expand 6.5 per cent in 2012, sharply slower than the 8.4 per cent rate tipped earlier by the bank.

The World Bank said the financial turmoil caused by the escalation of the sovereign debt crisis in Europe was spreading to both developing and high-income nations and was generating ‘‘significant headwinds’’.

It said capital investment to developing nations had fallen by nearly half compared with a year ago.

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Europe appeared to be in recession and growth in several major developing nations (Brazil, India, Russia, South Africa and Turkey) had slowed, partly as a result of a tightening in domestic policy.

BusinessDay, with wires

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