World Bank Cuts Global Growth Forecasts

The World Bank cut its global growth forecast to 2.5 percent this year, citing a recession in the euro zone that threatens to further weigh on a global economy already plagued by a slowdown in emerging markets.

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The Washington-based institution today lowers its forecast from a June estimate of 3.6 percent in the largest revision since January 2009, when the lender cut its global estimate for that year by 2.1 percent. The euro area may contract 0.3 percent, compared to a previous forecast for a 1.8 percent gain. The U.S. growth outlook has been cut from 2.9 percent to 2.2 percent.

“Even achieving these much weaker outturns is very uncertain,” the World Bank said in its Global Economic Prospects report released today. “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.”

The debt crisis in Europe has the potential to trigger another global financial crisis like that of 2008, according to the World Bank. The bank’s growth forecasts in its most recent report assume that the euro countries “muddle through,” said Justin Lin, the World Bank’s chief economist. If they fail to do so, “the downturn is likely to be longer and deeper than the last one,” with no country spared, he said.

Decelerating growth in developing economies, which were the “motor of growth” during the last recession, is mostly the result of domestic policies such as higher interest rates, which were “engineered…because these countries were overheating,” said Andrew Burns, who heads the World Bank’s global macroeconomics team.

The World Bank estimates that high-income economies will grow 1.4 percent in 2012, down from a June estimate of 2.7 percent, while emerging economies, from Indonesia to South Africa, will grow 5.4 percent, compared to a June forecast of 6.2 percent.

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