World Bank warns of ‘very difficult year’

The US economy will continue to suffer, the World Bank estimates, but not as much as poor countries [GALLO/GETTY]

The World Bank has warned the international community to brace for slow growth and economic challenges in 2012, as the International Monetary Fund said it would seek an additional $500bn in lending resources to help mitigate the worsening financial crisis. 

In a report issued late on Tuesday, the Washington-based bank substantially cut its forecasts for growth in both developed and poorer nations in its twice-yearly report, issued late on Tuesday.

“Europe appears to have entered recession, and growth in several major developing countries [Brazil, India and to a lesser extent Russia, South Africa and Turkey] has slowed,” the bank said as it updated forecasts made last June.

It predicted the global economy will expand by 2.5 per cent in 2012 and by 3.1 per cent in 2013, well behind the 3.6 per cent growth for each year that the bank had projected in June.

The US economy will also suffer from slower global growth, the report said, though not by as much as developing countries.

“The world is very different than it was six months ago,” said Andrew Burns, head of the bank’s global economics team and lead author of the report. “This is going to be a very difficult year.”

Meanwhile, the IMF said in a statement that it would seek to raise $500bn when officials from the G20 economies meet in Mexico City on Thursday and Friday to discuss raising the fund’s budget.

It said it expected to need up to $1tn to meet borrowing requirements as a consequence of the financial crisis.

‘Exploring options’

“At this preliminary stage, we are exploring options on funding and will have no further comment until the necessary consultations with the Fund’s membership have been completed,” a Fund spokesman said in a statement.

While eurozone nations have already promised to contribute an extra 150 billion euros ($200 billion) of the proposed $500 billion, getting funds from more advanced economies, like the US, might be difficult.

With budget issues at home, some U.S. Republicans have threatened to withdraw $100 billion in US funds from the IMF if it is used to bail out eurozone countries.

Emerging market countries such as China and Brazil have said they are willing to contribute new funds to the IMF in exchange for greater voting power. Emerging market powers have repeatedly argued in recent times that their power at the IMF should be increased to reflect their growing clout in the world economy.

The World Bank report said that while Europe was moving toward a long-term solution to its debt problems, markets remained nervous.

“While contained for the moment, the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains,” the World Bank said, referring to the US investment bank that went bankrupt in 2008 and helped intensify a global financial crisis.

Against that backdrop, it said developing countries were even more vulnerable than they were in 2008 because they could find themselves facing reduced capital flows and softer trade.

In addition, many developing countries have weaker finances and would not be able to respond to a new crisis as vigorously.

The World Bank pointed out that since last August risk aversion to Europe has shot up and “changed the game” for developing countries that have seen their borrowing costs escalate sharply and the flow of capital to them decrease.

“No country and no region will escape the consequences of a serious downturn,” the World Bank said, adding that now was the time for developing countries to plan how to soften the impact of a potential deep crisis.