The Tribune

THE World Bank on Tuesday warned that fears about the eurozone had reduced investors' tolerance for risk, and it urged poorer economies to protect themselves by reducing their debts.

In the report, a scheduled update to the bank's overview of the global economy, the bank forecasts sluggish growth in high-income countries, like Japan, Germany and the United States, in the coming years. It expects more modest growth in the middle-income economies that have been the engine of the global recovery, like China and Brazil. And it sees developing countries in Africa, Asia and Latin America experiencing slower growth than they have for most of the past decade.

"The world is at a very difficult juncture," said Andrew Burns, a lead author of the report, in an interview, citing fears about the stability of the eurozone, slower growth in emerging economies and pervasive market uncertainty as major factors.

The report concluded that "renewed market nervousness" about the euro area had "caused the price of risk to spike upwards globally".

The bank largely maintained the dreary economic forecasts it made in January, when it significantly cut its growth expectations and warned of a shock "similar in magnitude to the Lehman crisis" as a worst case. It now expects global output to increase 2.5 per cent in 2012 and 3 per cent in 2013. In January, it forecast that global output would grow 2.5 per cent this year and 3.1 per cent next year.

From 2004 to 2007, before the financial crisis hit, the global economy grew at an annual rate of roughly 5 per cent, according to International Monetary Fund data.

Compared with other forecasters, the World Bank's predictions are slightly more pessimistic. The IMF, for instance, foresees growth of 3.5 per cent in 2012 and 4.1 per cent in 2013. The global outlook had brightened early in 2012, the report said, as European leaders promised to devote more money to end their crisis and policy changes to further unite the Continent.

In response, European bond yields fell and investment ticked up. But the calm of the winter has dissipated in the spring.

Investors have returned to punishing a variety of European bonds, pushing Spain to request a bailout for its faltering banks last weekend. Political uncertainty is rife as well, with a Greek exit from the eurozone increasingly mentioned as a possibility.

In the last few months, fearful investors have again cut their risk exposure, pulling money from around the world and parking it in the safety of assets like US bonds. Capital flows to developing countries fell an astonishing 44 per cent from April to May, Burns said in an interview.

Such market gyrations are likely to be fairly common in the postcrisis period, the bank said, and the effects will be felt globally. "Sharp swings in investor sentiment and financial conditions will continue to complicate the conduct of macro policy in developing countries," the report said.

Still, the bank sees Europe muddling through its sovereign debt crisis without any market catastrophe, and the world maintaining its lackluster but steady growth path, as the most likely outcome. The forecast is not entirely reassuring, however. Economists at the World Bank, like most forecasters, have failed to foresee crises in the past, and are warning of significant uncertainties ahead.

"This is the third May or June in a row where Europe has been embroiled in tensions," Burns said. "In each and every previous incident, it has calmed towards the end of June. That is our baseline expectation."

The bank strongly reiterated a warning to developing countries in the report: Prepare for market turbulence by strengthening your balance sheets, such as by cutting deficits and reducing short-term debt exposures.

According to the bank's data, about 40 per cent of developing countries were running a surplus in 2007, before the global downturn began. Last year, just 19 per cent were. "That doesn't mean that their policies have deteriorated," Burns said, suggesting that the swing was largely the result of the crisis. But Burns noted that the countries' relatively strong fiscal position heading into the crisis served them well, and he urged them to "move in that direction once again".

More generally, the bank's economists said that while Europe might pose a short-term threat to middle and lower-income countries, in the long term their prospects and growth trajectories remained strong.

In the case of China, for instance, growth "doesn't depend on domestic demand in high-income countries, and ultimately it doesn't depend on their export demand," said Hans Timmer, the director of the World Bank's development prospects group. Future growth would instead come largely from within the country and other poorer but fast-growing economies, he said.

Officials at the bank also warned that high-income countries were not making the changes necessary to ensure that their economies are competitive going forward, prolonging their periods of economic malaise and losing ground to the rest of the world. Such changes might include reducing long-term deficits, making certain industries more competitive or investing in infrastructure.

"In high-income countries, a good crisis is being wasted," said Timmer.

On Tuesday, Christine Lagarde, the managing director of the International Monetary Fund, also warned of a global growth slowdown and renewed threats to financial markets.

"We need a strategy that is good for stability and good for growth," Lagarde said at a Centre for Global Development event in Washington, according to her prepared remarks. "This must start with the advanced economies, especially in Europe." Lagarde urged "very accommodating monetary policy", "direct support to banks" and "growth-friendly" fiscal policies.

By Annie Lowrey

of the New York Times News Service