“The sovereign debt crisis in the eurozone appears to be contained.”
Phew. That’s a relief then.
We just needed Justin Lin, the World Bank’s Chief Economist, to confirm it.
Hang on a second, though. Because Lin promptly burst the balloon:
“However, the risk of a global freezing-up of the markets and as well as a global crisis similar to what happened in September 2008 are real.”
The World Bank backed up that sobering prediction in its global economic growth forecasts. Having projected a 3.6% expansion for both 2012 and in 2013 in June, it’s now trimmed the estimates to 2.5% and 3.1%, respectively.
And that’s based on the eurozone situation not getting any worse.
However, stating that the 17-nation bloc has already probably dipped into recession territory, the bank says that if the debt contagion intensifies, it could hack as much as 4% off the global growth forecast.
But what I want to know is how, back in June, the World Bank managed to come up with a 1.8% growth estimate for the eurozone this year. I guess the heat must have gotten to them, because they’re now saying that the euro-area economy will contract by 0.3% this year.
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The biggest word of caution, however, is reserved for emerging markets…
Noting that the developing nations aren’t as strong financially as their wealthier, developed counterparts, the World Bank says up-and-coming countries could be more vulnerable than they were before the financial crisis.
If a eurozone-born disaster hits, the reduced trade, growth and an indiscriminate investor sell off would batter developing markets, just as the meltdown of 2008 did. That’s reflected in the World Bank’s downward revision to emerging market growth from 6.2% to 5.4%.
So what can these nations do to mitigate disaster? The World Bank proposes two solutions…
First, pinpoint essential spending areas and cut back on the rest. Second, at the same time, ensure that measures are in place to cushion the impact – whether that’s paying down now as much debt as possible, or storing cash.
Question is, though, with the deep-rooted, dire nature of the eurozone’s problems likely to cripple even the stronger countries, will that be enough?