GDP growth in the developing world will slow to a projected 2.1 percent in 2009 from 5.8 percent in 2008, according to World Bank estimates released on Tuesday. The bank has more than halved its November 2008 projection of 4.4 percent growth in developing countries in 2009, reflecting the rapid deterioration of global financial and economic conditions.

The new Global Economic Prospects update also notes that global growth is expected to contract by 1.7 percent this year. This would be the first decline in world output since World War II. GDP is projected to decline by 3 percent in OECD countries and by 2 percent in other high-income economies.

The World Bank’s baseline forecast predicts growth momentum to turn weakly positive in 2010 as financial-sector consolidation, lost wealth and knock-on effects from the financial crisis continue to dampen economic activity. However, the pace and timing of the recovery is still highly uncertain.

"Across the developing world, we see that conditions of recession are affecting the poorest people, making them even more vulnerable than before to sudden shocks -- but also reducing opportunities available to them, and frustrating their hopes," said Justin Yifu Lin, World Bank chief economist and senior vice president, Development Economics, "This could reverse years of progress, and is nothing less than an emergency for development."

In the update, the bank emphasized that even though growth should rebound -- albeit slowly -- economic activity will remain depressed, with unemployment and significant sectoral adjustment persisting for the next two years.

"Even if global growth turns positive again in 2010, output levels will remain depressed, fiscal pressures will mount, and unemployment levels will rise further in virtually every country well into 2011," explained Hans Timmer, manager, Global Trends, in the World Bank’s Development Prospects Group.

World trade in goods and services is expected to fall 6.1 percent in 2009, a historic decline. At US$47/bbl in 2009, oil prices are projected to be more than 50 percent below their 2008 levels. Non-oil prices are also expected to remain low, some 30 percent lower than in 2008.

Fiscal balances are projected to deteriorate sharply in developing countries in response to weaker revenues, higher borrowing costs, and larger transfers to maintain social safety nets. This could be particularly worrisome in developing Europe and Central Asia, where trade and production have severely contracted, the private sector is highly vulnerable, and social safety nets have broad coverage.

The developing world's need for external financing is likely to increase to US$1.3 trillion in 2009, including current account deficits and principal repayments on private debt coming due. With declining capital flows, this would generate a financing gap of between US$270 and US$700 billion. The largest funding gaps are in Europe and Central Asia, Latin America, and Sub-Saharan Africa.

World GDP growth is expected to increase to a modest 2.3 percent in 2010, but if a balance of payments crisis were to emerge within a developing region, it would prove difficult to contain and would hamper global recovery. Another risk is that the recovery in credit markets may proceed more slowly due to continued financial sector problems, which would prolong the period of capacity adjustment in the real sector and extend the global downturn.

Regional growth forecasts

Europe and Central Asia has been worst affected by recent developments. GDP in the region is expected to fall by 2 percent in 2009, compared with a 4.2 increase in 2008. The markdown in growth for the region as compared with the bank’s December forecast is 4.8 percentage points, the sharpest revision among developing regions.

Latin America and the Caribbean will also likely see GDP contract in 2009, although at the country level outturns may be diverse. Overall, GDP is projected to decline 0.6 percent following gains of 4.3 percent in 2008.

East Asia and the Pacific is likely to be most affected by the falloff in global investment and trade. Already this has cut sharply into industrial production and capital spending. GDP growth is expected to ease to 5.3 percent in 2009, as growth in China slumps to 6.5 percent, and several smaller economies in the region, including Thailand fall into recession.

Prospects for South Asia have been marked down to 3.7 percent growth for 2009 from earlier forecasts of 5.4 percent for 2009 -- and down from 5.6 percent growth in 2008. Though terms of trade have moved in the region’s favor with lower oil prices, weaker export demand is being felt sharply.

Growth in the Middle East and North Africa appears least affected among developing regions, dropping just 0.3 points from earlier projections to 3.3 percent. Reduced oil revenues and cuts in oil output will restrain GDP among oil exporters to 2.9 percent from 4.5 percent in 2008.

In Sub-Saharan Africa, GDP growth in 2009 is expected to halve from 4.9 percent in 2008, dropping 1.8 points below earlier projections. The dramatic shift in commodity prices will have strong effects across countries.

(China Development Gateway April 1, 2009)