|The latest Global Economic Prospects report, released June 9, projects that global real GDP growth will expand 3% in 2010, following a 2.1% contraction in 2009, led by 6.2% growth in developing countries (4.5% excluding China and India). However, the longevity and magnitude of the recovery remains unclear due to evolving European sovereign-debt troubles. Heightened uncertainty points to downside risks, as recent financial market turmoil and a sharp fall-off in capital flows have highlighted. A credit ‘event’ could lead to markedly slower growth. As European banks carry large holdings of troubled eurozone debt, to the extent these assets deteriorate, banks could be forced to limit credit, including flows to developing countries. While Euro-Area output firmed into April, growth is expected to slow on heightened uncertainty and fiscal tightening, which will likely weaken external demand for developing countries. Potentially more expensive private capital and diminished aid flows are also key concerns.|
|The global recovery remains fragile in the face of strong headwinds, including waning impacts of stimulus measures, recently introduced fiscal tightening and heightened uncertainty in Europe (Global Economic Prospects 2010, www.worldbank.org/gep2010 ). While the evolving situation in Europe has not derailed the recovery, the decline of the euro, equity market losses and lower commodity prices highlight the fragility of the recovery. Policy steps appear to assure liquidity over the next two years, but growth could disappoint if market uncertainty persists. Moreover, although unlikely, a crisis of confidence could lead to significantly slower world growth, with high-income countries slipping into a double-dip recession.|
|Capital flows faltered in May, as bond issuance and equity placement tanked. Only one developing country sovereign-bond deal was placed in May ($1.25bn for Malaysia)—given heightened market-volatility and borrowing-cost sensitivity. Similarly, IPO equity-placements fell to the lowest monthly level since August 2009. The decline in syndicated bank-lending was less pronounced, but flows remained well below pre-crisis levels. Early-June data shows capital flows remain sharply subdued, as bond issuance ground to a halt and many sovereigns have delayed issuance plans (Albania, Angola, Argentina, Indonesia, Kenya, Macedonia, Poland, Tanzania).|
|Industrial production remains vibrant in Europe—although data for May, when the sovereign debt-crisis in Greece intensified, is not yet available. Export orders have buoyed output in Germany and France, particularly for intermediate goods—suggesting that manufacturing activity and investment among Europe’s trade partners firmed. A weak euro is also boosting competitiveness. Nevertheless, capital spending has lagged the rebound in exports, and domestic demand has remained tepid. More recent data suggests that European debt-woes have undermined consumer and business confidence and EU -activity may weaken as a result. The latest reading of the ZEW index of investor and analyst expectations for Germany plunged to 28.7 in June from 45.8 in May. Moreover, recently announced European fiscal consolidation-measures will weigh on domestic demand.|
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