The World Bank warned on Tuesday that developing countries should brace for a growth slowdown stemming partly from Europe's debt woes, as it sharply scaled back its estimates for expansion.
Europe appears to have entered recession, and growth in several major developing countries (Brazil, India and to a lesser extent Russia, South Africa and Turkey) has slowed, the bank said as it updated forecasts made last June.
It predicted the global economy will expand by 2.5 percent in 2012 and by 3.1 percent in 2013, well behind the 3.6 percent growth for each year that the bank had projected in June.
Developing countries' economies will continue to outpace those of richer, developed countries but the World Bank also lowered its forecasts for growth in these countries to 5.4 percent in 2012 and 6 percent in 2013.
That was down from previous estimates of 6.2 percent and 6.3 percent respectively for growth in developing countries.
As well, the World Bank foresees rising threats to growth.
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, it said.
It also cited failure so far to resolve high debts and deficits in Japan and the United States and slow growth in other high-income countries, and cautioned those could trigger sudden shocks.
On top of that, political tensions in the Middle East and North Africa could disrupt oil supplies and add another blow to global prospects, the World Bank said in a sobering assessment of the challenges facing the economy. It said that while Europe was moving toward a long-term solution to its debt problems, markets remain skittish.
While contained for the moment, the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains, the World Bank said, referring to the U.S. investment bank that went bankrupt in 2008 and helped intensify a global financial crisis.
On balance, the World Bank said global economic conditions were fragile and there remains great uncertainty as to how markets will evolve over the medium term.
Against that backdrop, it said developing countries were even more vulnerable than they were in 2008 because they could find themselves facing reduced capital flows and softer trade. In addition, many developing countries have weaker finances and wouldn't be able to respond to a new crisis as vigorously.
The World Bank pointed out that since last August risk aversion to Europe has shot up and changed the game for developing countries that have seen their borrowing costs escalate sharply and the flow of capital to them decrease.
No country and no region will escape the consequences of a serious downturn, the World Bank said, adding that now was the time for developing countries to plan how to soften the impact of a potential deep crisis.
High-income countries have prime responsibility for preventing a crisis, the World Bank said, but developing countries have an obligation to support that process both through the G20 (Group of 20 rich and developing countries) and other international fora.
Among other things, developing countries could help by avoiding entering into trade disputes and by allowing market prices to move freely.
It also said developing-country government should start contingency planning to identify spending priorities and to try to shore up safety net programs. Those contingencies should take into account possible drops in commodity prices and a fall in capital inflows, the World Bank said.
(Reporting By Glenn Somerville; Editing by Chizu Nomiyama)