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Prospects Weekly: Global GDP growth forecast is significantly downgraded in latest World Bank Global Economic Prospects report

Global Macroeconomics Team's picture
Global Economic Prospects report. Though the slowdown in high-income economies will be sharper, developing countries will also be affected. Downside risks related to the loss of markets confidence in the ability of one or more high-income countries to repay their debt remains a serious concern. Since August credit default swap rates in both high-income and developing countries have increased significantly. Sub-Saharan Africa was one of the fastest growing developing regions in 2011, but remains vulnerable to outturns in the global economy.
Global GDP growth forecast is significantly downgraded in latest World Bank Global Economic Prospects report. The global economy is now expected to expand 2.5 and 3.1 percent in 2012 and 2013 versus the 3.6 percent projected in June for both years. High-income country growth is now expected to come in at 1.4 percent in 2012 and 2 percent in 2013, versus forecasts in June of 2.7 and 2.6 percent for 2012 and 2013 respectively. Growth in developing countries has been revised down to 5.4 and 6.0 percent versus 6.2 and 6.3 percent in June. While developing countries are in much better shape than high-income countries, they remain vulnerable to significant downside risks. If global conditions were to deteriorate sharply, then low- and middle-income countries, would also likely be affected. Indeed, in contrast to 2008/09, they have much less fiscal space available to respond to a new crisis
Developing country Credit Default Swaps (CDS) rates move higher since August. The resurgence of market concerns about fiscal sustainability in Europe and the exposure of banks to stressed sovereign European debt pushed CDS rates of most countries (including developing countries) upwards beginning in August 2011. By early January 2012, emerging-market bond spreads had widened by an average of 117 bps from their end-of-July levels, and developing-country stock markets had lost 8.5 percent of their value. Since October, however, the median CDS rates of developing countries with relatively good credit histories have declined to 162 points and developing country sovereign yields have eased from 672 to 616 basis points. Further, notwithstanding the recent downgrades to the credit rating of nine Eurozone countries, CDS rates in developing countries have held steady. 

Growth in Sub-Saharan Africa remained robust, inching up from 4.8% in 2010 to 4.9% in 2011, remaining just shy of its pre-crisis average of 5%. Excluding South Africa, which accounts for over a third of the regions GDP, growth in the rest of Sub Saharan Africa was even stronger at 5.9% in 2011, making it one of the fastest growing developing regions. Higher investment flows, rising consumer spending, the coming on stream of new mineral exports in a number of countries, and the rebound to growth in Cote’d’Ivoire, should support Sub-Saharan Africa’s growth acceleration to 5.3% in 2012 and 5.6% in 2013. Nonetheless, risks to growth prospects remain weighted on the downside as heightened uncertainty from the Eurozone debt crisis could shave growth in Sub-Saharan Africa by up to 1.7 percentage points in 2012, as merchandise exports, tourism receipts, commodity prices, foreign direct investment, and remittances -important growth drivers - remain susceptible to the turn of events in the Eurozone.

Download the Prospects Weekly as PDF here.