Justin Yifu Lin, the World Bank's Chief Economist and Senior Vice President for Development Economics (YU LINTAO)

The World Bank released its Global Economic Prospects (GEP) 2012 in Beijing on January 18, announcing that the global economic situation is not optimistic. Developing countries should prepare for further downside risks, as eurozone debt problems and weakening growth in several large emerging economies are dimming global growth prospects, the report said.

The bank has lowered its growth forecast for 2012 to 5.4 percent for developing countries and 1.4 percent for high-income countries (-0.3 percent for the eurozone), down from its June estimates of 6.2 and 2.7 percent (1.8 percent for the eurozone), respectively. Global growth is now projected at 2.5 and 3.1 percent for 2012 and 2013, respectively.

Slower growth is already visible in weakening global trade and commodity prices. Global exports of goods and services expanded an estimated 6.6 percent in 2011 (down from 12.4 percent in 2010), and are projected to rise by only 4.7 percent in 2012. Meanwhile, global prices of energy, metals and minerals, and agricultural products are down 10, 25 and 19 percent respectively since peaks in early 2011. Declining commodity prices have contributed to an easing of headline inflation in most developing countries. Although international food prices eased in recent months, down 14 percent from their peak in February 2011, food security for the poorest, including in the Horn of Africa, remains a central concern.

"Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time," said Justin Yifu Lin, the World Bank's Chief Economist and Senior Vice President for Development Economics.

Developing countries have less fiscal and monetary space for remedial measures than they did in 2008/09. As a result, their ability to respond may be constrained if international finance dries up and global conditions deteriorate sharply.

To prepare for that possibility, Hans Timmer, Director of Development Prospects at the World Bank, said: "Developing countries should pre-finance budget deficits, prioritize spending on social safety nets and infrastructure, and stress-test domestic banks."

While prospects in most low-and middle-income countries remain favorable, the ripple effects of the crisis in high-income countries are being felt worldwide. Already, developing country sovereign spreads have increased 45 basis points on average and gross capital flows to developing countries plunged to $170 billion in the second half of 2011, compared with $309 billion received during the same period in 2010.

"An escalation of the crisis would spare no one. Developed- and developing-country growth rates could fall by as much or more than in 2008/09" said Andrew Burns, Manager of Global Macroeconomics and lead author of the report. "The importance of contingency planning cannot be stressed enough."

The report said, despite the increasingly cloudy global environment and the anticipated economic slowdown, growth in the East Asia and Pacific region will remain fairly robust due to strong domestic demand, substantial fiscal space for policy interventions, downside flexibility in policy interest rates, and significant reserve levels.

The report also pointed out that the economic growth in China, which eased over the course of 2011, from 10.4 percent in 2010, to 9.5 percent in the third quarter of 2011, is expected to dip further to a still robust 8.4 percent in 2012. The bank indicates it is the result of the Chinese Government's continuing efforts to

dampen overly fast growth in a number of economic sectors.