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Prospects Weekly: Global Economic Prospects report projects that world real GDP growth will moderate to 3.3% in 2011

The latest Global Economic Prospects report, released January 12, projects that global real GDP growth (in 2005 U.S. dollar terms) will moderate to 3.3% in 2011, after a strong 3.9% rebound in 2010 that was led by 7% gains in developing countries. High-income economies registered better-than expected growth of 2.8%. Looking ahead, developing countries are projected to continue outpacing high income countries through 2012. A recovery in foreign capital inflows supported the rebound in developing countries, but flows were highly concentrated among a small subset of larger middle-income countries with deep financial markets. And left unchecked, excessive flows can lead to destabilizing asset bubbles and abrupt currency valuation swings that can do lasting damage to economies. Annual double-digit price increases for food price inflation is pressuring low-income households. And if global food prices continue to increase, a repeat of the conditions of the 2008 “food crisis” cannot be ruled out. http://www.worldbank.org/globaloutlook
In most developing countries, GDP has regained levels that would have prevailed had there been no boom-bust cycle, and strong growth is projected through 2012. The robust recovery in developing countries in 2010 was remarkable in that it mainly reflects an expansion of domestic demand, which has accounted for a full 45% of global growth in the year. Further, developing countries are increasingly an important source of stability, with many of the risks to global growth centered in high-income countries and reflecting as yet unresolved imbalances generated by the boom. In contrast, the recovery in several economies in emerging Europe and Central Asia and in some high-income countries is less well-established and output remains below pre-crisis levels. High household debt and unemployment, and weak housing and banking sectors are likely to mute recoveries—with continuing tensions tied to debt-sustainability issues in Europe. 
Very low policy-induced interest rates in high-income countries combined with better growth prospects in developing countries prompted a recovery in capital inflows. Net international equity and bond flows rose by 42% and 30%, respectively in 2010, with nine middle-income countries receiving the bulk of the flows. Short-term debt, equities and bonds, particularly corporate bonds, posted the strongest gains. Foreign direct investment to developing countries rose a more modest 15% in 2010, reaching $410bn after falling 40% in 2009. Low-income countries experienced modest declines in capital flows in 2009 and modest increases in 2010, partly reflecting their reliance on relatively stable FDI. However, many low-income countries did benefit from stronger remittance inflows, a recovery in tourism and higher commodity prices. South-South flows are increasingly important for low income countries. 

If international commodity prices continue to rise, affordability issues and poverty impacts could intensify.  Although real food prices in most developing countries have not increased as much as those measured in U.S. dollars, they have risen sharply in some poor countries. Notably, there are some similarities with the food-price spike of 2008, which also coincided with strong developing country growth, high oil prices, and high liquidity. However, compared with the 2008 grain price shock, current global commodity market conditions are not as severe. Grain production and stocks are much larger now than seasons prior to the 2007-08 price spike and oil market supply-demand conditions are not as tight.

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