The World Bank has warned the international community to brace for slow growth and economic challenges in 2012 stemming partly from Europe's debt woes.
The bank substantially cut its forecasts for growth in both developed and poorer nations in its twice-yearly report, issued late on Tuesday.
"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 per cent in 2012 and by 3.1 per cent in 2013, well behind the 3.6 per cent growth for each year that the bank had projected in June.
The US 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.
Developing countries' economies will continue to out pace those of richer, developed countries, but the World Bank also lowered its forecasts for growth in these countries to 5.4 per cent in 2012 and six per cent in 2013.
That was down from previous estimates of 6.2 per cent and 6.3 per cent respectively for growth in developing countries.
"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 US 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 US investment bank that went bankrupt in 2008 and helped intensify a global financial crisis.
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 would not 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.
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