Developing countries likely to cushion rich-country slowdown in 2008, with Romania’s real GDP growth expected to remain robust Contacts: In DC : Merrell Tuck, tel. (202) 473-9516; Mob: (202) 415 1775mtuckprimdahl@worldbank.orgIn Bucharest : Cătălin Păuna, tel. + 40-21-2010330cpauna@worldbank.org BUCHAREST, January 15, 2008 – Resilience in developing economies is cushioning so far the current slowdown in the United States, with real GDP growth for developing countries expected to ease to 7.1% in 2008, while high-income countries are predicted to grow by a modest 2.2%, says the World Bank. For its part, Romania experienced a mild slowdown in GDP growth from 7.7% in 2006 to around 6% in 2007. Solid economic growth is expected to continue beyond 2008, provided that policy responses are made in a timely way to tackle internal and external imbalances. Continued growth will also depend on vigorous structural reforms, including in the public sector.While real GDP growth remains strong in Europe and Central Asia, it is expected to moderate from 6.7 % in 2007 to 6.1 % in 2008 and 5.7 % in 2009. In Central and Eastern Europe (CEE) growth has expanded by a solid 6% in 2007, spurred by rapid growth in credit and real wages, strong capital inflows and, in some countries, including Romania, high remittances inflows. External demand is expected to weaken in the Region overall this year, due to slower growth in the OECD, especially in Germany and the Euro Area. Slower domestic demand growth is also expected in some countries because of projected lower private consumption and investment growth.Inflationary pressures—which have risen in several CEE countries, including Romania, due to sustained strong domestic demand and rising food and fuel prices during 2007—are likely to ease over the medium term, tied to generally tighter credit conditions in both international and domestic markets.“Several countries in Europe and Central Asia are noticeably affected by heightened risk aversion and volatility in international financial markets, more than most countries in the rest of the developing world” says Hans Timmer, co-author and Manager of the Global Trends team in the Bank’s Development Prospects Group.In line with the regional trend, real GDP growth in Romania is projected to ease slightly, though still remain robust in the medium term. Downside risks are significant, reflecting the need to tighten policies to contain inflationary pressures and to avoid bigger external deficits. Ensuring long term sustainable growth sufficient for the country to catch up with the rest of the EU requires paying increased attention to productivity and competitiveness-driven structural reforms. This includes focusing on the efficiency of public resource allocation, on reforms to labor markets, and on human development.Global Economic Prospects 2008 (GEP 2008) notes that world growth slowed modestly in 2007 to 3.6% compared with 3.9% in 2006, a downturn due largely to weaker growth in high-income countries. In 2008 global growth is expected to be 3.3%.A weaker US dollar, the specter of an American recession and rising financial market volatility could cast a shadow over this soft landing scenario for the global economy. These risks would cut export revenues and capital inflows for developing countries, and reduce the value of their dollar investments abroad. In this context, the reserves and other buffers that developing countries have built up in past years may be needed to absorb unexpected shocks.“Overall, we expect developing-country growth to moderate only somewhat over the next two years. However, a much sharper United States slowdown is a real risk that could weaken medium-term prospects in developing countries,” said Uri Dadush, Director of the World Bank’s Development Prospects Group and International Trade Department. The report’s authors assume that credit turmoil in international markets will persist into late 2008, but that costs to large financial institutions will remain manageable. Moreover, they predict that the spillover from problems in the US housing market on consumer demand will remain limited. “Looking at trade, strong import demand across the developing countries is helping to sustain global growth. As a result and given a cheaper US dollar, American exports are expanding rapidly. This is helping shrink the U.S. current account deficit and is contributing to a decline in global imbalances,” said Hans Timmer, co-author and Manager of the Global Trends team in the Bank’s Development Prospects Group. Recent robust developing country growth has contributed to high commodity prices, notably for oil, metals and minerals. These have benefitted many commodity exporters, thus explaining the strength of demand growth in some poorer countries. However, the recent increase in grain prices – partly due to increased grain production for biofuels – is hurting real incomes among the urban poor.GEP 2008 also argues that more pru ...