Debt crisis to hurt growth

PROLONGED uncertainty and turmoil in the Eurozone risk derailing the world economy recovery if heavily-indebted developed countries have to swallow austerity medicine more quickly, the World Bank said yesterday in its latest Global Economic Prospects 2010.

While the World Bank expects global GDP growth to be 3.3 per cent in 2010 and 2011, and 3.5 per cent in 2012, an extended sovereign debt crisis could cut growth to 3.1 per cent in 2010, followed by 2.9 per cent and 3.2 per cent in 2011 and 2012.

“Deeper and more widespread effects might arise if the situation causes investors to become significantly more risk averse; or in a less likely scenario, if there is a major crisis of confidence, prompted by (or causing) a default or major restructuring of high-income sovereign European debt.”

The global recovery will be powered by developing countries, which should see growth rates in excess of 6 per cent for the next three years. In contrast, the World Bank only projects growth in high-income countries to strengthen from 2.3 per cent this year to 2.7 per cent in 2012.

The report follows comments by the IMF’s Naoyuki Shinohara, who said that Asia would lead the recovery.