World Bank: Time to Curb Your Risk Appetite

NEW YORK (TheStreet) -- Stocks are in rally mode Wednesday, muffling out a dire warning on global growth from the World Bank.

While investors ramp up risky investments, the recent assessment on economic growth builds a case for a short-lived rally, not a sustained one. High income countries will only grow 1.4% this year, down from an earlier prediction of 2.7%, according to the newly-released report Global Economic Prospects 2012. The World Bank also cut its 2012 forecast for developing countries, which are expected to growth by 5.4% instead of 6.2%.

The World Bank notes that slower growth is already visible in weaker global trade and commodity prices. "Global exports of goods and services expanded an estimated 6.6% in 2011 (down from 12.4% in 2010), and are projected to rise by only 4.7% in 2012," said the report. "Meanwhile, global prices of energy, metals and minerals, and agricultural products are down 10, 25 and 19% respectively since peaks in early 2011."

The report, not surprisingly, was downbeat on Europe. Countries in the eurozone are expected to contract by 0.3% in 2012 and sovereign debt yields remain high. "While contained for the moment, the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains," says the report.

"The global economy is entering into a new phase of uncertainty and danger," said Justin Yifu Lin, the bank's chief economist. "The risks of a global freezing up of capital markets as well as a global crisis similar to what happened in September 2008 are real."

The outlook comes as market sentiment has turned markedly positive in January. The Dow Jones Industrial Average, up 2.2% year-to-date by Tuesday's close, was tacking on another 50 points in trading Wednesday.

In particular, news reports on the International Monetary Fund's latest plans gave a boost to European equities. The IMF is pushing for Brazil, Russia, India and China to help double its lending capacity to $885 billion, more than double the current $385 billion available.

Economists said that while the World Bank's assessment is not original, it is yet another reminder that the global outlook rests heavily on what happens with the European debt crisis. The warning that the eurozone crisis could lead to another global financial and economic meltdown is very grim, says Ed Yardeni, economist with Yardeni Research. However, he acknowledged that the scenario has "been out there ever since the global economy started to recover in early 2009."

-- Written by Chao Deng in New York.

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