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The headquarters of the World Bank in Washington.


The World Bank has slashed its outlook for the global economy, citing "significant headwinds" from the European debt crisis.

Global gross domestic product will expand 2.5 per cent in 2012, a significant revision from the Washington-based institution's June estimate of 3.6 per cent. Global GDP will grow 3.1 per cent next year, the World Bank said in its latest "Global Economic Prospects" report.

The World Bank's forecasts darken what is already a gloomy outlook for 2012.

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GDP of the euro zone will contract 0.3 per cent this year, according to the lender. That weakness will weigh heavily on the rest of the world, the report says. World Bank economists estimate that growth in developing economies will slow to 5.4 per cent this year from 6 per cent in 2011 and 7.3 per cent in 2010. Global trade is projected to expand only 4.7 per cent this year after growth of 6.6 per cent in 2011 and 12.4 per cent in 2010.

"Even achieving these much weaker outturns is very uncertain," the report says. "The downturn in Europe and weaker growth in developing countries raises the risk that the two developments reinforce one another, resulting in an ever weaker outcome."

And that's not all. The World Bank, which draws funding from 187 countries to support development and humanitarian projects in the globe's poorest regions, also sees potential trouble from a lack of confidence in Europe's efforts to resolve its debt crisis, high deficits in the United States and Japan, political tensions in the Middle East and North Africa that could disrupt oil supplies, and a "hard landing" by one or more "economically important middle-income countries."

But the biggest threat is Europe, according to the World Bank. Its economists say a credit crunch like the one that followed the collapse of Lehman Brothers Holdings Inc. is possible if European leaders fail to restore confidence in the region's banks. "The world could be thrown into a recession as large, or even larger, than that of 2008/09," the report says.

That prospect should focus the minds of policy makers in Europe and their counterparts in the Group of 20 nations.

The well from which the G20 fire brigade drew its economic stimulus in 2009 has all but run dry. Much has been written about the sorry state of the finances of the world's richer countries, but the fast-growing emerging markets are running short of fiscal space – 38 per cent of developing countries are estimated to have budget deficits of 4 per cent of GDP or more. The World Bank's Prospects Group, led by Andrew Burns, also is skeptical that central banks can do much more than they already have.

The World Bank's primary mission is to aid the poorest. Its message to those countries: Prepare for the worst.

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A severe financial crisis could cause oil and metals prices to plunge by 24 per cent, which would cripple poorer regions that rely on the export of commodities. Trade volumes could decline by 7 per cent, and remittances sent home from family members working in richer countries decline by 6.3 per cent. The later especially would hurt 24 nations where remittances represent 10 per cent of GDP.

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