World Bank warns of global economic slump

The World Bank has sounded a note of caution on the global economy, which it says has reached a turning point with a slowdown that has already begun.

In its annual Global Economic Prospects report, the World Bank has said global growth would decline to 4.5 per cent in 2007, from a likely 5.1 per cent in 2006, and rise only marginally in 2008 to 4.6 per cent.

While the global growth accelerated in the first half of 2006, the Bank has said that there are indications that the "pace of expansion is already slowing".

Developing countries, including India, are projected to grow by 7 per cent for the year, more than twice as fast as high- income countries (3.1 per cent), with developing regions growing by close to or more than 5 per cent.

For India, the bank has estimated 2006 GDP growth at 8.7 per cent, but forecast a slower rate of growth of 7.7 per cent in 2007 and a further slowdown at 7.2 per cent in 2008.

It adds that regional imbalances in distribution of growth in India are causing difficulties as inflationary pressures and capacity constraints, concentrated in rapidly growing cities, co-exist with considerable slack elsewhere in the economy.

The report adds that a soft landing remains likely, but adds that many factors could result in a more than pronounced slowdown. "A faster than expected weakening of housing markets in high-income countries (particularly the United States) could generate a much sharper downturn and even recession, with potentially significant effects for developing countries."

Much slower growth would likely cause commodity prices to weaken more than already projected, potentially placing many developing countries, that have so far avoided current-account problems in difficulty," the report says.

The report points out that so far inflationary effects of rapid economic growth have been largely confined to markets for global goods, such as commodity sectors. It, however warns that if measures to slow growth in key developing nations such as China, Argentina and India fail, inflation in those countries could pick up.

"That could lead to a more marked slowdown later on, either because of much sharper tightening of policy or because of endogenous factors such as loss of external competitiveness".

With regards to India, the report stated that successive hikes in policy rates in the country had increased interest rates, but higher inflation meant that real interest rates were negative in August.

Nothwithstanding robust export demand and a first quarter current account surplus in India, strong domestic demand is expected to result in a small further deterioration of regional current account deficits in 2006, particularly in Pakistan.

In contrast, strong remittance flows and robust exports are expected to propel the current account of Bangladesh towards balance.