21-01-2012 22:49:41

World to face extended fiscal volatility

(Gulf News, January 20) – The World Bank has cut its forecast for global growth for this year and next. It now expects economic expansion to be 2.5 per cent in 2012, down from an earlier prediction of 3.6 per cent. Of greatest concern is the Bank's warning that "some of the financial turmoil in Europe has spread to developing and other high-income countries which, until earlier, had been unaffected".

It goes on to note that this contagion has pushed up borrowing costs in many parts of the world, pushed down stock markets, while capital flows to developing countries have fallen sharply. For the global economy, the worst case scenario that has been looming since the start of the Eurozone financial crises, is coming true. The world is paying the price for the lack of fiscal discipline in Europe and the political dithering of its leaders. Europe needs to get its finances in order and implement a coherent economic growth plan. For now, there is no convincing signal that it can do either.

The countries of the Middle East have been sheltered from the worst of the financial storm, partly because relatively high oil prices have allowed governments to use their revenue to invest in infrastructure and boost their economies. These countries have used the present crises as an opportunity to invest for the future. But, while many countries in the region have substantial resources, they must be careful not to overextend themselves, as the international financial system is set for an extended period of volatility.

An economic slowdown in Europe and other big oil-consuming countries — like China and India — will result in a drop in demand and lower prices. The political instability associated with the Arab Spring has also discouraged foreign direct investment in the region and been a drag on key industries, like tourism. The World Bank has warned that there are dangerous times ahead. It is right.

TAGS: World Bank, Europe, global economy, Eurozone financial crises, Middle East, international financial system, China, India, Arab Spring