Global economy at risk as eurozone weakens

Updated: 2012-01-19 07:56

By Chen Jia and Wei Tian (China Daily)

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Capital outflows from China likely to accelerate: World Bank report

BEIJING - A recession in the eurozone is likely to drag the global economy into a double-dip recession and accelerate capital outflows from China and other emerging economies, exacerbating pressure on governments to adjust macroeconomic policies, the World Bank said on Wednesday.

The Washington-based institution lowered its 2012 global growth forecast to 2.5 percent from the 3.6 percent level it anticipated in June.

European countries might experience a contraction of 0.3 percent, 1.5 percentage points lower than the previous estimate and the lowest since 2002 aside from the 2009 recession.

Lin Yifu, senior vice-president and chief economist of the World Bank, said in Beijing that China might maintain a relatively strong growth of 8.4 percent, even though the global outlook was gloomy.

"The government still has room to increase investment in infrastructure construction and social welfare to support the economic expansion," Lin said.

The growth of the world's second-largest economy this year is expected to fuel its imports of energy and natural resources, which could support global trade.

The World Bank warned emerging countries to pay close attention to capital outflows, because "a severe crisis could cause remittances to developing countries to decline by 6 or more percent".

"Capital-control policies could be used if necessary," Lin said.

Global economy at risk as eurozone weakens

In the fourth quarter of 2011, accelerated capital outflows contributed to a decline in China's foreign exchange reserves, which slid to $3.18 trillion from $3.2 trillion at the end of the third quarter, according to the People's Bank of China, the central bank.

"Contracting operations in the European banking sector will accelerate the outflow of short-term arbitrage capital from emerging markets," a report by the Chinese credit rating agency Dagong Global Credit Rating Co said on Wednesday.

The agency listed the eurozone crisis as the top concern in the global financial outlook for 2012.

"The sovereign debt crisis in the eurozone will be more complicated in 2012, while the current debt crisis is likely to develop into a currency crisis in the region," the report said.

The European Central Bank has undertaken unprecedented easing measures in an effort to resolve the debt crisis. These steps have included offering unlimited 3-year loans to banks at a fixed rate of 1 percent and cutting banks' reserve ratio from 3 percent to 1 percent.

Dagong suggested that if such measures continue, the eurozone might avoid a sudden worsening of the crisis, but it would face selling pressure on the euro due to the collapse of external confidence.

"Emerging economies such as China are capable of defending themselves against the crisis in Europe, but countries with a strong reliance on capital from developed countries will be pushed to adverse conditions," according to Dagong.

China Daily