World Bank sees capital-flow risks, global growth slowing in 2011

World Bank sees capital-flow risks, global growth slowing in 2011

Washington: Capital inflows, a driving force of the recovery in emerging countries, now pose risks to global growth as they can trigger abrupt currency fluctuations that may do lasting damage to some nations, the World Bank said.

The Washington-based institution on Wednesday left a growth forecast for the world’s economy this year unchanged at 3.3%, from a revised 3.9% in 2010. It predicted that the slowdown, which reflects capacity constraints in developing nations and restructuring in developed economies, will be followed by faster growth of 3.6% in 2012.

“The pickup in international capital flows reinforced the recovery in most developing countries," Hans Timmer, the World Bank’s director of development prospects, said in a press release on Wednesday. However, heavy inflows to certain middle-income economies may carry risks and threaten medium-term recovery, especially if currency values rise suddenly or if asset bubbles emerge.

“While the recovery is broad-based and solid, the growth rates are not strong enough to undo the damage that was done during the crisis in all parts of the world," Timmer said on a conference call.

Nations from Indonesia to South Africa are striving to limit currency volatility as near-zero borrowing costs in advanced economies spur demand for higher-yielding assets in emerging markets.

The Group of Twenty leaders in November said developing nations facing a surge of capital inflows can adopt regulatory steps to cope, and the International Monetary Fund is now seeking to establish guidelines on how to respond.

The report said countries that attracted the most funds were middle-income ones with well developed debt and equity markets, where large inflows either have caused their currencies to appreciate by more than warranted by their fundamentals, or have forced them to take extraordinary measures to prevent a disruptive appreciation.

“Resisting such an appreciation comes with costs, and its success is not guaranteed," the bank said.

For instance, inflation in countries from China to India is high or accelerating, and currencies from Brazil to Thailand still have appreciated more than 7% in real effective terms since the start of 2010, the World Bank said.

While capital flows are expected to continue supporting growth in emerging countries this year, if they accelerate further and growth escalates to above baseline projections, already existing inflationary pressures and asset price bubbles could build further, according to the bank.

The bank estimates that developing economies accounted for 46% of global growth last year and will continue to lead, with forecast expansion of 6%, down from 7% in 2010. High-income nations will expand 2.4%, from 2.8% last year.

Across Asia Pacific on Thursday, South Korea raised interest rates and announced price controls, while Japan reported an unexpected fall in machinery orders and Australian job growth failed to match the median forecast in a Bloomberg survey of economists.

The World Bank said developing countries should tighten macroeconomic policies, including monetary conditions.

This can be achieved both through higher interest rates and regulatory changes, but also through controlled currency appreciation, the report said

China’s growth will slow to 8.7% this year from 10% in 2010, the bank forecast. India will grow 8.4%, down from 9.5% last year.

In the euro region, while investors’ concerns on debt sustainability is not expected to affect the real economy, they could derail global growth if they were to escalate, according to the report, which also mentioned risks linked to extensive cross-exposures among high-income country banks. The bank expects the region to grow 1.4%, from 1.7% in 2010.

In June 2010, the World Bank, which bases its projections on market prices, expected 2010 global growth of 3.3%.

Growth in the US is expected to be unchanged at 2.8% in 2011 with strong domestic demand growth, though the economy continues to deal with high unemployment and the shrinking of an overgrown housing sector. The bank said that the value of the euro and of the dollar have oscillated a great deal over the past several years, potentially reducing their qualities as a stable store.