Global Economic Prospects (Vol. 5)

The State of the World

Destabilizing global events characterized much of 2011. Natural disasters, like Japan’s earthquake and Thailand’s floods, and man-made calamities, such as economic turmoil in Greece and the rest of the euro zone, adversely affected both financial markets and economic output across much of the world. But as 2012 began, prospects looked brighter: Europe appeared to have stabilized, developing nations adopted looser monetary policies that spurred activity and many financial market indicators rose. Risk premiums declined. Relative calm prevailed, and growth rates in most global economic sectors started an upward trajectory. Improved demand, led by developing nations, soon spread to the “high-income countries.” A rebound seemed likely.

But by May 2012, many of the year’s earlier gains had slipped. Market anxiety – over Europe’s continuing political and fiscal uncertainty and over ratings agencies’ downgrading of banks –caused credit default swap spreads to widen to late-2011 levels. Equity markets in developed and developing nations lost most of their 2012 gains, commodity prices dropped and developing countries’ currencies fell against the US dollar...