Europe’s Crisis Could Lead to Years of Volatility: World Bank
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Europe’s woes are worse than previously believed and could have long term repercussions for the global economy. As a result, developing countries should strengthen their domestic fundamentals by re-emphasising medium-term development strategies, said the World Bank.
Despite the rebound in economic activity in the first four months of this year, the recent resurgence of tensions in the eurozone is a timely reminder that the aftershocks of the 2008/09 financial crisis have not played out fully and that volatility and uncertainty are here to stay.
Europe’s woes are worse than previously believed and could have long term repercussions for the global economy. As a result, developing countries should strengthen their domestic fundamentals by re-emphasising medium-term development strategies, said the World Bank.
Despite the rebound in economic activity in the first four months of this year, the recent resurgence of tensions in the eurozone is a timely reminder that the aftershocks of the 2008/09 financial crisis have not played out fully and that volatility and uncertainty are here to stay.
Citing the increase in market jitters, the World Bank noted that most industrial commodity prices are down, with crude and copper prices down 19 and 14 percent respectively from May 1st, while developing country currencies have lost value against the US dollar, as international capital fled to safe haven assets such as German as US government bonds.
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Developing and high-income country stock markets have lost some 7 percent, erasing almost two-thirds of the gains generated over the preceding four months.
In the report Global Economic Prospects released today, the World Bank projects that growth in advanced countries will be weak, averaging 1.4 percent for 2012, while the eurozone contracts by 0.3 percent.
For the immediate short-run, the report notes that eurozone tensions pose the most serious risk for developing countries, particularly for countries with strong reliance on worker remittances, tourism and commodities, or those with high levels of short-term debt or medium-term financing requirements.
Andrew Burns, lead author of the report, said:
[quote] Where possible, developing countries need to move to reduce vulnerabilities by lowering short-term debt levels, cutting budget deficits and returning to a more neutral monetary policy stance. Doing so will provide them with more leeway to loosen policy, should global conditions take a sharp turn for the worse. [/quote]
The World Bank predicts that developing country growth will slow to a relatively weak 5.3 percent in 2012, before strengthening somewhat to 5.9 percent in 2013 and 6.0 percent in 2014. Overall, global GDP is projected to rise 2.5, 3.0 and 3.3 percent for the same period.
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