World and Nation

World Bank sees euro crisis taking global toll

WASHINGTON — The World Bank on Tuesday warned that fears about the eurozone had reduced investors’ tolerance for risk, and it urged poorer economies to protect themselves by reducing their debts.

In the report, a scheduled update to the bank’s overview of the global economy, the bank forecasts sluggish growth in high-income countries, like Japan, Germany and the United States, in the coming years. It expects more modest growth in the middle-income economies that have been the engine of the global recovery, like China and Brazil. And it sees developing countries in Africa, Asia and Latin America experiencing slower growth than they have for most of the past decade.

“The world is at a very difficult juncture,” said Andrew Burns, a lead author of the report, in an interview, citing fears about the stability of the eurozone, slower growth in emerging economies and pervasive market uncertainty as major factors.

The report concluded that “renewed market nervousness” about the euro area had “caused the price of risk to spike upwards globally.” The bank largely maintained the dreary economic forecasts it made in January, when it significantly cut its growth expectations and warned of a shock “similar in magnitude to the Lehman crisis” as a worst case. It now expects global output to increase 2.5 percent in 2012 and 3 percent in 2013. In January, it forecast that global output would grow 2.5 percent this year and 3.1 percent next year.

From 2004 to 2007, before the financial crisis hit, the global economy grew at an annual rate of roughly 5 percent, according to International Monetary Fund data.

Compared with other forecasters, the World Bank’s predictions are slightly more pessimistic. The IMF, for instance, foresees growth of 3.5 percent in 2012 and 4.1 percent in 2013. The global outlook had brightened early in 2012, the report said, as European leaders promised to devote more money to end their crisis and policy changes to further unite the Continent. In response, European bond yields fell and investment ticked up. But the calm of the winter has dissipated in the spring.

Investors have returned to punishing a variety of European bonds, pushing Spain to request a bailout for its faltering banks last weekend. Political uncertainty is rife as well, with a Greek exit from the eurozone increasingly mentioned as a possibility.

In the last few months, fearful investors have again cut their risk exposure, pulling money from around the world and parking it in the safety of assets like U.S. bonds. Capital flows to developing countries fell an astonishing 44 percent from April to May, Burns said in an interview.

Such market gyrations are likely to be fairly common in the postcrisis period, the bank said, and the effects will be felt globally. “Sharp swings in investor sentiment and financial conditions will continue to complicate the conduct of macro policy in developing countries,” the report said.