Maintaining progress amid turmoil

SUBMITTED BY GLOBAL MACROECONOMICS TEAM 

The World Bank's latest update on the world economy leads with a message for developing countries—the crisis is over for most developing countries, and it is time these countries shifted their focus from crisis-fighting to tackling inflationary pressures and dealing with high commodity prices.

Global Economic Prospects—June 2011 (produced by the team managing this blog) says that these developing countries need to return monetary policy to a more neutral stance and rebuild the fiscal cushions that had allowed them to respond to the crisis with counter-cyclical policies.

Sustaining balanced growth in the medium term will depend on the kind of slow-acting social, regulatory and infrastructural reforms that generate improved productivity and sustainable growth.

In contrast, high-income countries and many of Europe’s developing economies are still saddled with crisis-related problems such as high unemployment, household and banking-sector budget consolidation, and concerns over fiscal sustainability, among other factors.

Taking into account these factors as well as the recent events in Japan and the Middle East and North Africa, global GDP is expected to grow 3.2% this year before edging up to 3.6% in 2012. But further increases in already high oil prices could significantly curb economic growth.

Already, high oil prices and production shortfalls due to bad weather have contributed to higher food prices, which has negative consequences for the poor who spend a higher proportion of their income on food.

Although domestic food prices in most developing countries rose much less than international prices during the 2010/11 spike (7.9% since June 2010 versus 40% for international prices; see chart), local prices may rise further as international price changes slowly pass through into domestic markets.

And if the 2011/12 crop year disappoints, food prices may rise further, placing additional pressures on the incomes, nutrition, and health of poor families.

To read the detailed outlook and access the data underlying these main highlights, please visit our online interactive edition: www.worldbank.org/globaloutlook. 

Over the course of the week we will discuss the trends in major macroeconomic indicators and main risk factors facing the global economy—starting tomorrow with the ongoing uncertainty in oil-producing regions.