Drawing strength from the extensive stimulus measures, the world economy is restarting its growth engine that stalled due to the sweeping financial crisis. However, high unemployment and inflationary pressures will stay with both high-income and developing countries for some time. Additionally, a more conservative financial environment will mean higher financing costs for capital-hungry developing countries. Hans Timmer, Director of the World Bank Prospects Group, discussed these issues at a press conference on January 26 in Beijing. Edited excerpts follow:

The world economy is emerging from the throes of an unprecedented deep and synchronized recession provoked by the bursting of a global financial bubble. The consequences of the initial bubble and the crisis have been felt in virtually every economy, whether or not that country participated directly in the risky behaviors that precipitated the boom-and-bust cycle.

The immediate impacts of the crisis are, for the most part, in the past. After falling for two to three quarters, global GDP has begun recovering and output is expected to grow rapidly in the first half of 2010. However, as the positive contribution to growth from fiscal stimulus wanes, growth will slow in part because spending by households and the banking sector will be less buoyant.

Global GDP, which declined by 2.2 percent in 2009, is expected to grow 2.7 percent this year and 3.2 percent in 2010. World trade volumes, which fell by a staggering 14.4 percent in 2009, are projected to expand by 4.3 and 6.2 percent this year and in 2011. While this is the most likely scenario, uncertainty continues to cloud the outlook. Depending on consumer and business confidence in the next few quarters and the timing of fiscal and monetary stimulus withdrawal, growth in 2011 could be as low as 2.5 percent and as high as 3.4 percent.

Despite the return to positive growth, it will take several years before economies recoup their losses. About 64 million people will be living in extreme poverty (on less than $1.25 a day) in 2010 than would have been the case had the crisis been averted.

The lessons and fallout from the crisis are likely to reshape financial policies and market reactions for years to come. These changes may include: a tightening and broadening of the scope of financial market regulation; the introduction of rules and policies designed to isolate developing countries from excessive financial market volatility; increasing reliance on domestic intermediation and efforts to deepen regional financial markets; and a step backward from some of the innovative financial instruments.

These changes, plus increased risk aversion and the necessity for banks in high-income countries to rebuild their capital, suggest that liquidity will be more scarce and expensive in the years to come. As a result, firms in developing countries will face higher borrowing costs, lower levels of credit and reduced international capital flows.

While developing countries cannot avoid tighter international financial conditions, they can and should reduce domestic borrowing costs and promote local capital markets by expanding regional financial centers and improving competition and regulation in local banking sectors. Although likely to take some time to bear fruit, such steps could expand access to capital and help put developing countries back on the higher growth track from which they were derailed by the crisis.