The World Bank expects Australia to grow more rapidly this year than global high income countries as a whole. The Bank’s global economic forecast released today says real GDP is estimated to have expanded by 3.9 percent in 2010, once again led by strong domestic demand in developing countries. Restructuring and right-sizing in the banking and construction sectors, combined with necessary fiscal and household consolidation, will continue to drag on growth in many high-income economies and developing Europe and Central Asian countries. At the same time, growth is projected to slow in other developing countries due to emerging capacity constraints. Overall global GDP is expected to grow 3.3 percent in 2011, before picking up to 3.6 percent in 2012 as the drag on activity from restructuring in high-income countries eases somewhat.

The bank’s predictions for Australia are summarised in the following table:

13-01-2011 worldbankforecastforaustralia

The World Bank forecast says that strong growth of domestic demand in developing-country will continue to lead the world economy. Developing countries domestic demand is playing a major role in the recovery, representing 46 percent of global growth in 2010. GDP in low- and middle-income countries expanded 7 percent during 2010 (5.2 percent excluding India and China) and is projected to increase 6.0 and 6.1 percent in 2011 and 2012. As such it will continue to outstrip growth in the high-income countries (2.8, 2.4 and 2.7 percent in 2010, 2011 and 2012).

How Australian growth is expected to compare with the world as a whole:

13-01-2011 worldbankglobaleconomicforecasts

The Bank point to serious tensions and pitfalls persist in the global economy, which in the short-run could de-rail the recovery to differing degrees. These include the possibility that:

market concerns over debt sustainability in Europe escalate;

continued very low interest rates in high-income countries once again prompt large and volatile flows of capital toward developing countries that contribute to destabilizing movements in exchange rates, commodity prices, and asset-prices;

although real food prices in most developing countries have not increased as much as those measured in U.S. dollars, they have risen sharply in some poor countries;

and if international prices continue to rise, affordability issues and poverty impacts could intensify.

Longer-term risks center around the possibility that policy in the economies most directly hit by the crisis fail to shift focus from short-term crisis management toward measures that address the underlying (and difficult to resolve) structural issues that contributed to the crisis in the first place. These include:

putting in place credible plans for restoring fiscal sustainability;

placing more emphasis on fiscal measures that facilitate the re-employment of displaced workers; and, in many countries, programs to improve longer-term competitiveness;

completing the re-regulation of the financial sector;

pursuing policies that permit exchange rates to gradually adjust in-line with relative fundamentals; and,

reducing the volatility of major reserve currencies in order to sustain confidence in them as stores of value and facilitators of trade.

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Peter Fray
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