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The world economy is moving from a post-crisis bounce-back phase of the recovery to slower but still solid growth this year and next, with developing countries contributing almost half of global growth, according to the World Bank report, "Global Economic Prospects 2011".

The World Bank estimates that global GDP, which expanded by 3.9% in 2010, will slow to 3.3% in 2011, before it reaches 3.6% in 2012. Developing countries are expected to grow 7% in 2010, 6% in 2011 and 6.1% in 2012. They will continue to outstrip growth in high-income countries, which are projected to grow at 2.8% in 2010, 2.4% in 2011 and 2.7% in 2012.

The World Bank states that in most developing countries, GDP has regained levels that would have prevailed had there been no boom-bust cycle. Even so, while steady growth is projected through 2012, the recovery in several economies in emerging Europe and Central Asia, as well as in some high-income countries, remains tentative. "Without corrective domestic policies, high household debt and unemployment, and weak housing and banking sectors are likely to mute the recovery," it says.

In Europe and Central Asia, output is expected to expand by 4.7% in 2010, following a 6.6% decline in GDP during 2009, as several countries undergo intense restructuring. Output in Bulgaria, Kyrgyz Republic, Lithuania, and Romania stagnated or declined in 2010, and is forecast to expand by only 2% in 2011 and 3.3% in 2012. Excluding these countries, growth in the rest of the region is forecast to ease to 4.2% in both 2011 and 2012. The recovery in the region remains particularly sensitive to the situation in high-income Europe where the sustainability of sovereign debt remains a concern. "On the upside, strong developing-country domestic demand growth is leading the world economy," says Justin Yifu Lin, the World Bank's chief economist and senior vice president for development economics. "On the downside, many developing countries with close financial and trade ties with high-income Europe could see much weaker output if sovereign debt concerns in the Eurozone persist."

Money flows

Net international equity and bond flows to developing countries rose sharply in 2010, rising by 42% and 30% respectively, with nine countries receiving the bulk of the increase in inflows. Foreign direct investment to developing countries rose a more modest 16% in 2010, reaching $410bn after falling 40% in 2009. An important part of the rebound is due to rising South-South investments, particularly originating in Asia. "The pick-up in international capital flows reinforced the recovery in most developing countries," says Hans Timmer, director of development prospects at the World Bank. "However, heavy flows to certain big middle-income economies may carry risks and threaten medium-term recovery, especially if currency values rise suddenly or if asset bubbles emerge."

Most low-income countries saw trade gains in 2010 and, overall, their GDP rose 5.3% in 2010. This was supported by a pick-up in commodity prices, and to a lesser extent in remittances and tourism. Their prospects are projected to strengthen even more, with growth of 6.5% in both 2011 and 2012, respectively.

According to the report, current relatively high food prices are having a mixed impact. In many economies, dollar depreciation, improved local conditions, and rising prices for goods and services means that the real price of food has not risen as much as the dollar price of internationally traded food commodities. "However, double-digit price increases of key staples in the past few months are pressuring households in countries with an already-existing high burden of poverty and malnutrition. And, if global food prices rise further along with other key commodities, a repeat of the conditions in 2008 cannot be excluded," cautions Andrew Burns, manager of Global Macroeconomics in the World Bank's Prospects Group.