THE world economy will expand by up to 3.3 per cent this year, according to the World Bank's latest Global Economic Prospects released yesterday.
Developing countries will spearhead the recovery, growing twice as quickly as their higher income counterparts from now until 2012, the bank said.
But the projection is conservative compared with predictions by two other global organisations released in the past two months.
The International Monetary Fund is tipping 4.2 per cent global growth, and the Organisation for Economic Cooperation and Development expects 4.6 per cent.
The World Bank warned that while market conditions have improved, the initial market reaction to a possible Greek debt default and eventual contagion is an indication of the fragility of the current financial situation.
The recovery is now more than a year old and whether growth can be sustained will depend on the strength of private sector activity, as well as measures to address longer-term structural factors, it cautioned.
These factors include fiscal sustainability, banking sector restructuring, and underlying productivity.
'The fiscal situation in high-income countries in Europe and in France, the United States and the United Kingdom is currently on an unsustainable path, and there is a need for fiscal consolidation,' said the World Bank's manager of macroeconomics Andrew Burns at a media briefing.
If this is not managed well, market nervousness could result in a decline in capital available to developing countries - slowing investment and growth.
'Even in a less probable but more serious scenario, you could see a crisis occur similar in some sense to the East Asian crisis in some of these more highly indebted countries,' he said.
'That could have substantial knock-on effects in Europe and elsewhere.'
Mr Burns identified Eastern Europe, Central Asia, Latin America and the Caribbean as developing regions that were most at risk.
He said developing economies were in a relatively vulnerable fiscal position because of the efforts they had made to face the crisis.
Also, rising bad loans due to a slow recovery and significant levels of short-term debt may threaten banking-sector solvency in certain countries of developing Europe and Central Asia.
'But we expect many economies to continue to do well if they focus on growth strategies, make it easier to do business, or make spending more efficient,' said Mr Burns.
Other headwinds threatening medium-term growth include reduced global capital flows, high jobless rates and spare capacity of above 10 per cent in many countries.
Source: Straits Times, 11 Jun 2010