With global economic growth prospects dampened by the ongoing eurozone crisis, the World Bank has sharply lowered its global economic growth forecast and suggested effective policy actions from different countries.
The Washington-based organization on Tuesday lowered its global economic growth rate prediction to 2.5 percent in 2012 from its previous estimate of 3.6 percent in June 2011.
Developing countries should prepare for further downside risks, as the eurozone debt problems and weakening growth in several big emerging economies are dimming global growth prospects, the World Bank said in its newly-released flagship report "Global Economic Prospects (GEP) 2012".
"The world economy has entered a very difficult phase characterized by significant downside risks and fragility," the report said.
The bank has lowered its growth forecast for 2012 to 5.4 percent for developing countries and 1.4 percent for high-income countries, down from its June estimates of 6.2 percent and 2.7 percent respectively.
Global growth is now projected at 3.1 percent for 2013, down from its previous estimate of 3.6 percent.
The eurozone is predicted to register an output contraction of 0.3 percent in 2012, before picking up steam to grow 1.1 percent in 2013 as a result of the ongoing eurozone debt crisis.
"The financial turmoil generated by the intensification of the fiscal crisis in Europe has spread to both developing and high-income countries, and is generating significant headwinds," the report said.
The U.S. economy is predicted to grow 2.2 percent and 2.4 percent in 2012 and 2013 respectively, down from the World Bank's June estimates of 2.9 percent and 2.7 percent respectively.
The forecast for the Chinese economy has also been lowered to 8.4 percent and 8.3 percent for 2012 and 2013 respectively. The previous estimates were 8.7 percent and 8.8 percent respectively.
Slower growth is already indicated by weakening global trade and commodity prices. Global exports of goods and services expanded an estimated 6.6 percent in 2011, down from 12.4 percent in 2010, and are projected to rise by only 4.7 percent in 2012, the World Bank said.
Moreover, global prices for energy, metals and minerals, and agricultural products plunged 10 percent, 25 percent and 19 percent, respectively, compared with their peaks in early 2011, the World Bank said.
"The downturn in Europe and weaker growth in developing countries raises the risk that the two developments reinforce one another, resulting in an even weaker outcome," the report said.
"Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time," Justin Yifu Lin, the World Bank's chief economist and senior vice president for Development Economics, said in a World Bank statement Tuesday issued in line with the report.
Developing countries have less fiscal and monetary space for remedial measures after the onset of the financial crisis in 2008. As a result, their ability to respond may be constrained if international finance dwindles and global conditions deteriorate sharply, the World Bank warned.
To counter that, "Developing countries should pre-finance budget deficits, prioritize spending on social safety nets and infrastructure, and stress-test domestic banks," Hans Timmer, director of Development Prospects at the World Bank, said in the statement.
The global economic scenario is different from that six months ago, and developing countries should use their existing policy room as efficiently as possible to cope with downside risks, Andrew Burns, manager of Global Macroeconomics and lead author of the report, told reporters Tuesday in a conference call prior to the release of the report.
"The importance of contingency planning cannot be stressed enough," Burns said, adding that an escalation of the crisis would spare no one and that the growth rates in developed and developing countries could fall by as much or even more than those in 2008 and 2009.
The medium-term challenges represented by high deficits and debts in Japan and the United States, and the trend of slow growth in other high-income countries have not been resolved and could trigger sudden adverse shocks, the World Bank cautioned.