The global economy ushers in new phase of recovery, but vigilance is required

Photo: © World Bank

Two years after the crisis triggered by the collapse of Lehman Brothers, the world economy has entered a new phase of recovery. Most developing countries have recovered to pre-crisis (or close to pre-crisis) levels of activity and have transitioned from a bounce-back phase to more mature growth.

We estimate in our new online Global Economic Prospects 2011 report that the growth rate for the world economy was 3.9% in 2010 and is likely to be to 3.3% this year, then 3.6 % in 2012.

The GDP growth rate for developing countries was a robust 7 percent in 2010, up sharply from 2% growth in 2009. This year we project the developing world will record GDP growth of 6%, then edge to an estimated 6.1% in 2012. This far outstrips the high income countries, which grew by 2.8% in 2010 and are estimated to growth by 2.4% this year and 2.7% next year.

Developing countries’ domestic demand is playing a major role in the rebound, representing 46% of global growth in 2010.

So truly, we are in a new multipolar growth world.

But not everything is rosy - especially for high-income countries and some countries in the Europe and Central Asia Region.

High unemployment remains the main challenge. 

Monetary policy, fiscal stimulus programs, and growth have not been able to put people back to work yet, reflecting two forces at play. First, substantial excess capacity in inflated sectors built up in the boom period before the crisis like housing  and manufacturing. Second, there is a pressing need for these countries to restructure their economies by increasing household savings, strengthening bank regulations, and consolidating fiscal positions. 

Although the expected growth rate for developing countries is quite robust, the fallout from the crisis is not over yet, and from what we see, there are three main risks we need to watch over:

• the financial market situation in parts of the Euro Area
• large capital flows rushing into nine middle income countries as investors seek higher yields (given low interest rates in many high-income countries)
• food, commodity and fuel prices, which, if they jump higher could hurt the poor

These three risks, even though relatively unlikely, could derail or slow the global recovery.

For the long-term, sustainable global recovery and future growth are contingent on three factors. First, governments need to conclude financial reforms and improve regulations so as to avoid a similar crisis in the future. Second, fiscal stimulus policies need to be more sustainable and targeted. Third – and most importantly – growth needs to be promoted by shifting focus from demand management to supply side stimulus. 

Successfully tackling these challenges will result in increased productivity, more jobs and higher government revenue while reducing the risk from non-performing loans in the banking sector.