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Solid growth for world recovery, but not without its dangers

The world economy is moving from a post-crisis bounce-back to a period of slower growth over this year and next. This is according to the latest Global Economic Prospects 2011 published by the World Bank.

The report estimates that global GDP grew by 3.9% in 2010, but will slow to 3.3% this year, before recovering to 3.6% in 2012. Fastest growth continues to come from the developing world, where GDP was up 7% in 2010, and is expected to grow by 6% this year and 6.1% in 2012.

The report notes that in most developing countries “GDP has regained levels that would not have prevailed had there been no boom-bust cycle.”

The world is back on the road to recovery, but there are still dangers lurking.


The prospects were summarised by Justin Yifu Lin, the World Bank’s chief economist, who said: “On the upside, strong developing-country domestic demand growth is leading the world economy, yet persistent financial sector problems in some high-income countries are still a threat to growth and require urgent policy actions.”

It was also noted that foreign direct investment to developing countries rose by 16% in 2010 to reach $410 billion, after a drop of 40% in 2009. This is particularly due to South-South investments, mainly coming from Asia. But there are risks within these flows. Hans Trimmer, director of development prospects at the World Bank noted that: “…heavy inflows to certain big middle-income economies may carry risks that threaten medium-term recovery, especially if currency values rise suddenly or if asset bubbles emerge.”

Sudden large capital flows into certain developing countries would push up their exchange rates making it more difficult for them to export profitably.

The report also noted the risk coming from food price inflation, stating that “double-digit price increases of key staples in the past few months are pressuring households in countries with an already-existing high burden of poverty and malnutrition.” 

Food riots have already broken out in a number of countries, with India in particular attempting to limit price rises of basic commodities. This situation could well deteriorate further, especially with crops being devastated by floods in many parts of the world.

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Posted in Food price inflation, Foreign Direct Investment, GDP, World Bank

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