Hans Timmer January 2010

Crisis, finance and growth The acute phase of the crisis is over, but with a muted recovery it will take several years to undo the damage In the medium run higher capital costs will reverse the process of capital deepening, lower potential output, and slow growth Developing countries may overcome the medium - term impacts by strengthening their domestic financial markets

Liquidity in global inter - bank markets has returned to normal conditions Source : DataStream, World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Spreads appear to have stabilized at about 150 basis points higher than during the boom period Source : JP Morgan.

Bonds emissions recovered in the second half of 2009 Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Bank - lending was very weak most of the year Syndicated bank loans Source : DataStream, World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Private capital flows are unlikely to recover to the pre - crisis levels for some time Net private capital flows to developing countries Source : DataStream, World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Rebound in industrial production growth is easing Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth Industrial production growth, 3 m /3 m, saar

For much of the world industrial production has yet to recover pre - crisis levels Industrial production, index, January 2008= Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

For much of the world industrial production has yet to recover pre - crisis levels Industrial production, index, January 2008=100 Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Rebound in trade led by East Asia Quarterly import volumes, seasonally adjusted, annualized percentage change Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Commodity prices after easing from peaks in 2008 have firmed with the recovery Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth Real commodity prices ( adjusted for currency fluctuations and inflation differentials ) Index Jan 2000=100

As the influence of falling food and fuel prices fades, inflation is picking up Median CPI and composite price indices y / y %- change Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Continued financial - sector restructuring, implies a weak recovery Real GDP growth rates in percent Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Regional growth

Despite stronger growth, output will remain depressed for a long time Output gap, percent difference between actual and potential GDP Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Crisis has cut four - year growth rates by two or more percentage points in every region four year, average growth rate Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Crisis will have serious poverty impacts Increase in the global count of extremely poor of 64 million in 2010 Possible 35-50,000 additional children in Africa may have died of malnutrition in 2009 Unless aid is upped, program spending will have to fall even as need climbs

Nevertheless, progress toward MDGs will be made % of population living on less than $1.25/ day – 2005 PPPs Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Boom period conditions will be reversed Growth acceleration in developing countries was due to improved fundamentals (60%) and increased global liquidity (40%) As a result of the crisis capital costs will rise, capital deepening will be reversed and growth of production potential will slow

The boom did not reflect unusually strong demand from high - income countries GDP growthHigh - income import growth / Developing country export growth Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

The boom did not reflect unusually strong demand from high - income countries GDP growth Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Expansion of developing country trade is increasingly centered in developing countries Value of exports, average annual growth rate (%) High - income exportsDeveloping exports Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Since the early 2000 s, credit expansion has grown more than twice as fast as nominal GDP Source : Bank of International Settlements, World Bank k

Developing country interest rates fell substantially during the boom period Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Liquid capital markets prompted surge in developing country finance and investment Change in selected financial variables ( ) Cost of capital ( basis points ) -400 (% of GDP ) Capital inflows 5.0 Stock market capitalization 78.6 Private credit by deposits money banks 5.5 Investment 5.5 Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Falling capital costs were reflected in rising capital output ratios Increase in capital output ratio (2000 – 2008) Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Developing country potential output growth was boosted by low borrowing costs Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Medium - term impacts of crisis Tighter regulation Increased risk aversion Weakened financial center Increased government indebtedness Characteristics Higher capital costs Expansion of middle - income financial services Possible withdrawal from financial and trade globalization Less access to capital – especially for low income countries Consequences

Reduced FDI would be especially problematic for some regions Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Impact on potential output of a return to normal pricing of risk and higher base rates Transition impact on growth of potential Long - term impact on level of potential output Base rates at boom - period levels, spreads at October 2009 levels Base rates at boom - period levels, spreads at “ normal ” levels Base rates at 100 basis points higher than boom - period levels, spreads at October 2009 levels Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Selected indicators of banking sector efficiency Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

High costs in domestic banking sectors, because of poor regulation and a lack of competition Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth Index, high - income countries = 1

Interest rate margins in most countries are more than 300 basis points higher than in high - income countries Net interest margin in percent ( MRV ), histogram Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Impact of improved fundamentals on long - term growth prospects may counteract impact of crisis Growth of potential output ; deviation from baseline ; in percentage points Source : World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Concluding remarks Recovery too weak to undo damage done in 2009 Going forward process of capital deepening will be reversed There remains enormous scope for policy to help improve performance

For more information visit : www. worldbank. org / gep 2010 www. worldbank. org / globaloutlook http :// blogs. worldbank. org / prospects