World Bank Cuts Outlook as Euro Region Contracts

The World Bank cut its global growth forecast by the most in three years, saying that a recession in the euro region threatens to exacerbate a slowdown in emerging markets such as India and Mexico.

The world economy will grow 2.5 percent this year, down from a June estimate of 3.6 percent, the Washington-based institution said. The euro area may contract 0.3 percent, compared with a previous estimate of a 1.8 percent gain. The U.S. growth outlook was cut to 2.2 percent from 2.9 percent.

China, the world’s second-biggest economy, reported that foreign direct investment declined in December by the most since July 2009, underscoring the World Bank’s warning that developing economies should “prepare for the worst.” Home prices fell in 52 of 70 cities in December from November, statistics bureau data showed.

Turmoil in European still has the potential to trigger a global financial crisis reminiscent of 2008, according to the World Bank.

Muddling Through

The lender’s growth forecast assumes that the euro countries “muddle through,” Justin Lin, the World Bank’s chief economist, said in Beijing. If they fail to do so, with conditions in three or four of the nations deteriorating and the capital market freezing up, “the downturn is likely to be longer and deeper than the last one,” with no country spared, he said.

The estimated global expansion would compare with growth of 2.7 percent in 2011 and 4.1 percent in 2010, and a contraction of 2.3 percent in 2009, the World Bank estimates. The revision is the largest since January 2009, when the lender cut its global estimate for that year by 2.1 percentage points.

The MSCI Asia Pacific Index rose 0.4 percent as of 2:41 p.m. in Tokyo. on signs of strength within the global economy. A U.S. Federal Reserve report showed manufacturing in the New York region expanded at the fastest pace in nine months, while German investor confidence jumped the most on record and South Korean department store sales gained at the fastest pace in eight months.

The World Bank sees a global expansion of 3.1 percent in 2013, 0.5 percentage point lower than previously forecast.

Decelerating growth in these countries is mostly the result of domestic policies such as higher interest rates, which were“engineered, desirable because these countries were overheating” Burns said.

High-income economies are now seen growing 1.4 percent this year, down from a June estimate of 2.7 percent. That compares with 5.4 percent in emerging economies, including nations fromIndonesia

to South Africa, which in June were forecast to grow at a 6.2 percent pace.

Still, emerging markets are also feeling the pinch of the financial turmoil in the 17-nation euro area, according to the report. Developing economies’ stock markets had lost 8.5 percent of their value by early January compared with their level at the end of July, it said. In the second half of 2011, gross capital flows to these countries fell to 55 percent of the level in the year-earlier period.

Vulnerable Nations

Emerging markets are more vulnerable than in 2008 to a renewed global crisis because rich nations wouldn’t have the fiscal resources they had back then to support their economies, the World Bank said. Developing countries, whose deficits have also widened, should engage in contingency planning to have the necessary fiscal leeway if need be, it said.

“Should conditions in high-income countries deteriorate and a second global crisis materializes, developing countries will find themselves operating in a much weaker global economy, with much less abundant capital, less vibrant trade opportunities and weaker financial support for both private and public activity,” the World Bank said in the report.

Slower global expansion is already showing through softer trade figures and lower commodity prices, according to the World Bank, which was established after World War II to fight poverty and offers financial and technical assistance to countries.

The 2012 forecast for Japan was cut to 1.9 percent growth from 2.6 percent in June. The World Bank said it estimates that the euro region entered recession in the fourth quarter.

China’s growth will slow to 8.4 percent this year, the same as an interim revised projection released in November. It cutIndia’s 2012 forecast by 1.9 percentage point to 6.5 percent.

The Bank also explored the impact on the rest of the world of a more severe European crisis. Global growth could be 3.8 percent lower than now forecast this year in such a situation, it said.