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World Bank warns global growth will likely slow

By Christopher S. Rugaber
AP Economics Writer / January 17, 2012
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WASHINGTON—A recession in Europe and weaker growth in India, Brazil and other developing countries will likely slow global economic growth, the World Bank says.

In its twice-yearly report issued late Tuesday, the bank substantially cut its forecasts for growth in both developed and poorer nations. It now projects that the global economy will expand 2.5 percent this year and 3.1 percent in 2013. That's down from a June forecast of 3.6 percent growth for both years.

The U.S. economy will also suffer from slower global growth, the report said, though not by as much as developing countries.

"The world is very different than it was six months ago," said Andrew Burns, head of the bank's global economics team and lead author of the report. "This is going to be a very difficult year."

The report noted two major reasons for the projected global slowdown: Europe's debt crisis has worsened. And several big developing countries have taken steps to prevent growth from overheating and fueling inflation.

And a growing concern is that each trend is negatively affecting the other, Burns said during a conference call with reporters.

Europe's debt crisis has made investors nervous, so they are lending less to many emerging-market governments. That has pushed up interest rates in those countries.

International investors have also cut their investments in developing countries 45 percent in the second half of last year, compared to the same period in 2010.

At the same time, India, Brazil, Russia, South Africa and Turkey are taking steps to rein in borrowing in order to cool their economies. That might be prudent for those nations, Burns said. But coming at the same time as Europe's troubles, the moves "create a fairly dangerous dynamic where these two trends feed on themselves," he said.

The bank now forecasts that developing countries will grow 5.4 percent this year, below its June estimate of 6.2 percent. Developed nations will expand only 1.4 percent, down from its earlier 2.7 percent projection.

The 17 nations that use the euro, meanwhile, will shrink 0.3 percent in 2012, the bank said. That's down from an expansion of 1.8 percent that it forecast in June.

The U.S. economy will grow 2.2 percent this year and 2.4 percent in 2013, the report said. In June, the World Bank said the U.S. would grow 2.9 percent in 2012 and 2.7 percent in 2013.

Developing countries could be hit harder by a downturn than they were in the 2008 global crisis and should prepare for possible shocks, said the bank's chief economist, Justin Yifu Lin. He urged them to line up financing for budget deficits in advance, review the health of their banks and emphasize spending on social safety nets.

Developing countries are in a weaker position than in 2008 because many have higher debts and budget deficits than they did four years ago, Lin said.

If a global slump hits, "no country will be spared," Lin said at a news conference in Beijing. "The downturn is likely to be longer and deeper than the last one."

The weaker outlook in the U.S. is in part because of the anticipated global slowdown. But the World Bank also cites the on-going fight in Washington over spending and taxes as a reason for the downgrade.

The World Bank's updated U.S. forecasts are similar to most private-sector projections. And they would represent improvement from 2011's projected growth of 1.7 percent.

The U.S. government will give its first estimate for 2011 growth on Jan. 27.

Recent data show that the United States is already feeling some pain from Europe's crisis. Exports to Europe fell 6 percent in November, the Commerce Department said last week. That helped push the trade deficit up 10.4 percent to $47.8 billion.

Global trade has also fallen, partly because banks are cutting back on a type of lending known as trade financing. Trade financing enables exporters to obtain loans to cover their costs while they wait to receive payment for their goods.

Worldwide exports of goods and services increased last year at half the pace of the previous year. Still, that's better than 2009, when trade volumes shrank.

The World Bank lends to poor countries at low interest rates to support education, health and infrastructure projects.

The report follows similar warnings about the global economy in recent months. Christine Lagarde, managing director of the International Monetary Fund, issued a dire warning about the global economy last month.

In a speech at the State Department, Lagarde said that if Europe's debt crisis wasn't resolved, the world economy could face rising protectionism and isolationism, trends that helped cause the Great Depression in the 1930s.

And World Bank President Robert Zoellick last September criticized European leaders for not taking more decisive action to resolve the region's debt crisis.

He said then that the global economy "has entered a new danger zone."

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AP Business Writer Joe McDonald in Beijing contributed to this report.

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