RTTNews - The World Bank reduced its global GDP estimate as well as the outlook for most other economies and warned of a large decline in international capital flows amidst financial market fragility and recession.

The Washington-based lender now forecasts the world economy to shrink 2.9% this year, larger than its earlier prediction of a 1.7% decrease. In a report released on June 11, the lender had predicted the economy to shrink close to 3% in 2009. Global GDP is forecast to rebound with 2% growth next year and 3.2% by 2011.

The World Bank expects developing economies to grow 1.2% this year, following a 5.9% growth in 2008. The growth estimate for 2009 is much lower than the 2.1% expansion estimated in March. Following a slow growth in 2009, the bank sees a higher 4.4% growth in 2010 and 5.7% in 2011, albeit subdued relative to the strong performance before the current crisis.

When China and India are excluded, GDP in the remaining developing countries is projected to drop 1.6%, leading to continued job losses and throwing more people into poverty. China's GDP growth is seen at 7.2%, while Indian output growth is projected to be 5.1%. In 2010, India is expected to record 8% growth.

According to the latest Global Development Finance 2009 report, net private capital inflows to developing countries dropped to US$707 billion in 2008 amidst global economic recession and financial market fragility. Further, international capital flows are estimated to drop again in 2009 to US$363 billion.

Justin Lin, World Bank Chief Economist and Senior Vice President, Development Economics said, The need to restructure the banking system, combined with emerging limits to expansionary policies in high-income countries, will prevent a global rebound from gaining traction.

Policy measures adopted by a number of large economies helped to avoid systemic collapse. The lender stressed the importance of concerted global action while the crisis is underway. The bank said as the world is entering an era of slower growth, it requires tighter and more effective oversight of the financial system.

High income nations like OECD countries are estimated to shrink 4.2% in 2009, while the decline in the U.S. is seen at 3% and that in Japan at 6.8%.

The World Bank also lowered its growth forecast for East Asia and the Pacific region from its initial growth forecast of 5.3%. The World Bank noted that this region experienced the full brunt of the crisis due to its close trade links with high income nations and as well as declining investment. The region is now estimated to grow 5% this year, with recovery across the region expected to start in the second half of 2009 and into 2010. But, the turnaround is set to be gradual as the regional GDP is projected to rise 6.6% in 2010 and 7.8% by 2011.

The World Bank said Europe and Central Asia was the most adversely affected region by recent developments. Huge current account deficits and domestic overheating resulted in the reversal of capital flows. For this region, the lender sees 4.7% contraction in 2009, while it is expected to expand around 1.6% next year. The bank revised down the estimate for 2009 from a 2% fall predicted in late March.

Meanwhile, South Asia experienced a significant decrease in capital inflows and a a falloff in investment growth. An annual growth of 4.6% is estimated for the region, down from 6.1% in 2008. In 2010, output is predicted to grow 7% and 7.8% in 2011.

The Middle East and North Africa region growth is predicted to halve to 3.1% this year. Though this region is less directly affected by the credit crunch than other regions, local equity property markets came under immense pressure. The economy is set to expand 3.8% in 2010 and 4.6% in 2011.

At the same time, the Sub-Saharan Africa was adversely influenced by reduced external demand, plunging export prices, weaker remittances, tourism revenues and lower capital inflows. Growth is estimated to slow sharply this year to 1%, down from an average growth of 5.7% in the last three years.

For comments and feedback: contact editorial@rttnews.com