Overview

Turmoil in financial markets, slower growth in high-income countries, and rising inflation have all adversely affected growth prospects for developing countries over the near term.
Most countries have shown impressive resilience in this turbulent environment, and growth for developing countries as a group is expected to moderate from 7.8 percent in 2007 to a still strong 6.5 percent in 2008  (see the forecast summary table).

However, vulnerable countries that depend on foreign capital flows are likely to experience a sharper slowdown.
Moreover, despite strong production growth at the aggregate level, higher food and energy prices have caused real incomes to decline, significantly increasing the hardships faced by the very poor, particularly in urban centers.

Not all of the news is gloomy.
In some respects, the slowing of the global economy is welcome, coming as it does on the heels of several years of very fast growth and increasing signs of overheating, as illustrated by a dramatic increase in international commodity prices and by excessive inflationary pressures in a number of countries.

And the slowdown in U.S. domestic demand, along with the depreciation of the dollar, is helping to resolve long-standing global imbalances.

The U.S. current account deficit narrowed from 6.2 percent of GDP in 2006 to 4.9 percent during the final quarter of 2007.
These factors bode well for longer-term prospects, once the current cyclical adjustment—heightened by continuing financial turbulence—comes to closure.

But now, more than at any other time in recent years, the uncertainty surrounding the outlook is quite pronounced and tilted to the downside.
The turmoil in financial markets has deepened since late 2007.

Major banks, securities firms, and financial guarantors have announced sizable valuation losses on mortgages and other assets, which have strained their balance sheets.
The ensuing tightening of credit conditions, and the disruption to the financial system more generally, have been felt most directly by high-income economies, particularly the United States, where the housing sector has borne the brunt of the fallout from the subprime crisis.

The slowdown in the United States and in much of Europe appears to have intensified since the end of 2007, and GDP for the high-income members of the Organisation for Economic Co-operation and Development (OECD) is now projected to grow 1.5 percent in 2008, down a full percentage point from 2007.
Growth in developing countries is projected to slow by 1.3 percentage points in 2008, but at an expected 6.5 percent, growth will remain well above the average gains of the 1980s (2.9 percent), the 1990s (3.8 percent), and even the more recent period 2000–05 (5.3 percent).

Moreover, the continued strength of domestic demand and imports in developing countries is helping to cushion the global effects of the slowdown in high-income countries.
Developing-country imports have become an increasingly important driver of global growth.

More than half of the growth in global import demand is now originating in developing countries partly as a result, U.S. and, to a lesser extent, European exports have been booming—helping to moderate the extent of decline in their GDP growth.