Global economic growth is now expected to slow more than previously anticipated, according to the World Bank's Global Development Finance report released on Tuesday. The World Bank said it now expects world GDP growth to slow to 2.7% in 2008 from 3.7% in 2007 compared to its previous estimate of 3.3% growth in 2008.
The turmoil in the financial markets has only worsened since late 2007. Losses incurred by banks, securities firms, and financial guarantors have been felt most directly by high-income economies, particularly the United States and most of Europe.
The report said that while developing countries were adversely impacted by the tumultuous financial market conditions, slower growth in high-income countries, and rising inflation, most countries displayed impressive resilience, continuing to remain robust as a group.
Despite strong production growth at the aggregate level, however, soaring costs were leading to dwindling real incomes, with the poorest, especially urban centers, being hit the hardest. GDP growth in developing countries was projected to be 6.5%, down from 7.8% recorded last year.
Commenting on the report, Uri Dadush, Director of the World Bank's Development Prospects Group and International Trade Department said, "Strong growth in the developing world is certainly helping to offset the sharp slowdown in the U.S. But at the same time, rising global inflationary pressures - especially high food and energy prices were proving - are hurting large segments of the poor around the world."
Notwithstanding the volatility in the financial markets, the increasing number of foreign banks and their burgeoning acquisitions and the establishment of local affiliates in developing nations were a major contributor to the nations' economies.
As of the end of June 2007, foreign claims on developing country residents held by major international banks stood at $3.1 trillion, up from $1.1 trillion at the end of 2002.
Mansoor Dailami, Manager of International Finance in the Development Prospects Group, and lead GDF author said that foreign banks in developing countries contributed to expanded access to financial services, which helped spur efficiency and innovation in domestic banks. But he added that the ripple effect of shocks from the U.S. and European markets warranted the need for better "coordinated financial regulation, liquidity provision, and macroeconomic management."
Countries with large external loans, where private debt inflows into the banking sector contributed to expanding domestic credit, are particularly vulnerable to a credit crunch, including several countries in Europe and Central Asia, some in Latin America and the Caribbean as well as certain Sub Saharan African nations.
The bulk of private capital flows went to just a few big economies, among them the so-called BRICs - Brazil, Russia, India and China, while the poorest nations were more dependent on official aid, which further declined in 2007. The report warned that these countries should be wary about the possibility of their domestic banks facing funding difficulties in international markets if liquidity pressures in interbank markets continued to remain at elevated levels.
Net official development assistance by members of the Organization for Economic Co-operation and Development or OECD's Development Assistance Committee totaled $103.7 billion in 2007, down from a peak of $107.1 billion in 2005.
Moreover, the continued strength of domestic demand and imports in developing countries cushioned the global effects of the slowdown in high-income countries by helping moderate declining GDP growth in these regions.
Growth in developing nations despite the odds and slowdown among OECD countries was proof of their increased resilience to external shocks. Far fewer developing countries were today burdened with huge external debt imbalances and many had accumulated ample foreign reserves.
The report also added that the economic slowdown is in some ways welcome, coming as it has in the wake of several years of very fast growth and increasing signs of overheating, which had resulted in never-before-seen increases in international commodity prices leading to excessive inflationary pressures.
The slowdown in U.S. domestic demand, along with the depreciation of the dollar, was viewed as actually helping resolve long-standing global imbalances, and the outcome in the long-run after the current cyclical adjustment corrects itself is expected to be bright.
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June 12, 2026 17:14 ET Major central bank action was the focus this week in economic news. The European Central Bank became the first major central bank to move in response to the rising inflationary pressures in the backdrop of the conflict in the Middle East. In North America, the U.S. inflation and trade data as well as Canada’s central bank decision gained attention. The Chinese trade data was the main news in Asia.