Growth in developing countries will cushion slowdown

Strong economic growth in the developing countries should offset the impact of a slowdown among high income countries this year, according to the World Bank.* Although developed economies are expected to grow by only 2.2% the developing countries should expand by 7.1%.

Such a cushion will be particularly welcome with developed country growth slowing after a spectacular global expansion for four years.

The period from 2004-7 was probably the strongest for global growth since the early 1970s. As well as a booming economy, trade grew rapidly, exchange rates were relatively stable and financial markets generally performed well.

The fastest-growing developing country region this year looks set to be East Asia and the Pacific with forecast GDP growth of 9.7%. It is followed by South Asia with growth of 7.9% with Europe and Central Asia at 6.1%. The slowest growing developing region looks set to be the Latin America and the Caribbean with expected growth of 4.5%.

However, the World Bank identifies several risks to its optimistic central scenario. The “decoupling” thesis could be tested as an America recession could hit demand for the goods of developing countries harder than expected. Raw materials producers could also suffer as commodity prices fall.

Alternatively, developed country central banks could over-react by reducing interest rates too much. The resulting build-up in liquidity could lead to overinvestment and asset bubbles in developing countries.

Another risk is a sharp decline in the dollar. Although some countries would benefit from a weakening American currency others would suffer.

For example, large exporters to America would experience a loss of competitiveness. A sharp decline of the dollar could also increase uncertainty and volatility in developing country financial markets.