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Risk of global recession relapse

Washington, Dec. 11 (PTI): The World Bank has warned that after the “exceptionally slow growth” in the last two years, there is significant risk that the world could slip back into recession. The sluggish global economic outlook will impede poverty reduction in developing nations, the bank said in a report, ‘Global Economic Prospects and Developing Countries 2003: investing to unlock global opportunities’.

Developed countries must remove trade and investment barriers that hurt poor people in developing countries, it added.

“The (economic) recovery has been much more hesitant and uneven than we had expected,” said Nicholas Stern, World Bank chief economist and senior vice president for development economics.

According to the latest forecasts, high-income countries are expected to grow at about 2.1 per cent in 2003, while developing countries will grow at an average of 3.9 per cent.

Outside of Asia and eastern Europe, growth rates in most developing countries are too low to generate a marked reduction in poverty, the report said.

The bank said the corporate scandals in the US have hurt not only America but other countries as well. “The accounting scandals in the US have undermined the trust in reporting systems. Investors, who have come to rely on continuously rising equity prices, now find it difficult to assess the profitability of firms.”

That difficulty has sharply pushed up risk premiums in equity markets, it added.

In Europe and elsewhere, telecom sector still suffers from over investment and high debt burdens, making a speedy recovery of capital spending in these sectors unlikely. Uncertainty is keeping investors cautious throughout the world, it said.

While investors in high-income countries take their losses and replenish their reserves, they limit their exposure to developing countries and concentrate their assets in investment-grade borrowing countries. The rebound in 2002 was “less uniform than anticipated” and “the outlook for 2003 is for tepid growth.”

The bank forecasts oil prices of around $ 20 per barrel by 2004. They have risen to over $ 29 per barrel because of expectations of supply disruption in Iraq (due to war) and of increasingly tighter fundamental conditions.

Pointing out that private capital flows to developing countries are down sharply, Richard Newfarmer, lead author of the report, says, “we are looking at the most sustained fall in foreign direct investment in developing countries since the global recession of 1981-83.”

Meanwhile, the bank today pegged down the overall economic growth prospect of India and other nations in south Asia to 4.6 per cent in 2002, but said it would go up by 5.4 per cent in 2003 and further by 5.8 per cent in 2004. “The recent global economic slowdown, adverse weather conditions, internal and external security concerns reduced growth figures for south Asia region in 2002,” the report said.

The report expects GDP growth in south Asia to average 4.6 per cent this year, which is lower than 5.3 per cent projected in last year’s report. The lowering of growth projections assumes importance in view of lowering of India’s growth projection by private and multilateral agencies to 5-5.5 per cent for this fiscal due to drought and other factors.

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