World Bank Warns of Global Recession

The World Bank warned Wednesday that the global economy is on the cusp of a new financial crisis, one similar in magnitude to the chaos following the collapse of Lehman Brothers in 2008.

The Washington-based institution slashed its global growth forecast by the most in three years and urged developing countries to prepare for further downside risks as the Eurozone's debt crisis deepens.

The global economy is entering into a new phase of uncertainty and danger, the bank's chief economist, Justin Yifu Lin, said in a statement. The risks of a global freezing up of capital markets as well as a global crisis similar to what happened in September 2008 are real.

The bank's latest forecast marks an abrupt downturn in its outlook. Just six months ago, the bank forecast the world economy growing at 3.6 percent in 2012; now it has shaved 1.1 percentage points off of global growth, projecting a 2.5 percent growth this year. Emerging countries are expected to grow 5.4 percent, down from 6.2 percent previously projected, while developed countries will expand 1.4 percent, down from 2.7 percent. For the 17 countries using Europe's single currency, the World Bank forecast a contraction, cutting their growth outlook to negative 0.3 percent from a positive 1.8 percent.

For the U.S., the bank has cut this year's growth forecast to 2.2 percent from 2.9 percent and for 2013 to 2.4 percent from 2.7 percent, citing a global slowdown and the ongoing fight in Washington over spending and taxes.

China, the largest emerging economy and the world's second-largest economy, saw its expansion slow to a two-and-a-half-year low of 8.9 percent in the three months ended in December from the previous quarter's 9.1 percent, the Chinese government reported Monday.

While prospects in most low- and middle-income countries remain favorable, the ripple effects of the crisis in high-income countries are being felt worldwide.

Developing country sovereign spreads, a measure of how much it cost them to borrow, have already increased 45 basis points on average and gross capital flows to developing countries plunged to $170 billion in the second half of 2011, compared with $309 billion received during the same period in 2010.

An escalation of the crisis would spare no one, said Andrew Burns, manager of global macroeconomics and lead author of the report. The importance of contingency planning cannot be stressed enough.

Slower growth is already visible in weakening prices for global trade and commodities, several of which are important to developing economies.

Global exports of goods and services expanded an estimated 6.6 percent in 2011, down from 12.4 percent in 2010, and are projected to rise by only 4.7 percent in 2012.

Meanwhile, global prices of energy, metals and minerals, and agricultural products are down 10 percent, 25 percent and 19 percent, respectively, since peaking in early 2011. Declining commodity prices have contributed to an easing of headline inflation in most developing countries.

The World Bank's forecast is lower than ones from the International Monetary Fund and the Organization for Economic Co-operation and Development, which last updated their numbers in September and November, respectively.

The IMF, which has said it expects to cut its forecasts, had predicted world growth of four percent in 2012, while the OECD had that figure at 3.4 percent.