JOB RECOVERY: Unemployed people look for jobs at a job fair in Los Angeles. The World Bank report said job market stress in the United States has eased thanks to renewed economic growth (XINHUA/AFP)

With the financial crisis behind them, developing countries are now focusing on tackling specific challenges such as coping with inflationary pressure and dealing with high commodity prices. In contrast, prospects for high-income countries and many of Europe's developing countries remain clouded by crisis-related problems such as household and banking-sector budget consolidation and concerns over fiscal sustainability. Global Economic Prospects, the latest report of the World Bank, discussed these issues. Edited excerpts follow:

The global financial crisis is no longer the major force dictating the pace of economic activity in developing countries. The majority of developing countries have, or are close to having, regained full-capacity levels.

Macroeconomic policies in developing countries need to turn toward medium-term productivity enhancements, managing inflationary pressures and re-establishing the fiscal and monetary cushions that allowed most developing countries to make it through the crisis. In contrast, activities of high-income and some developing European countries continue to struggle with crisis-related problems, including banking-sector, fiscal and household restructuring.

Concerns about fiscal sustainability in high-income countries persist. High fiscal deficits and rising sovereign debt pose medium-term challenges to a wide-range of OECD (Organization for Economic Cooperation and Development) countries. Although steps being taken by authorities to resolve short-term problems in the euro zone should prevent an acute crisis, a loss of confidence could have negative implications for developing countries.

Further financial stresses may emerge, as monetary policies in high-income countries are tightened. As short- and long-term interest rates and re-financing costs rise, both banks and firms may find their balance sheets coming under renewed pressure—requiring additional measures to address shortcomings.

Continued recovery

The global recovery has broadened to encompass more firms, more countries and more components of aggregate demand. Improving labor market conditions in high-income countries and strongly expanding domestic demand in developing countries augur well for a continued maturation of the recovery that is now almost two years old.

The recovery in the United States has gained strength over the past six months and shows signs of becoming more self-sustaining. Significant gains in levels of manufacturing and services activity and business investment have helped to improve conditions in the U.S. labor market. The unemployment rate dropped to 9.1 percent in May 2011. Following relatively weak weather-influenced first-quarter GDP results, and flagging in the pace of the recovery in the second quarter, GDP growth is expected to pick up in the second half of the year, with whole year gains of 2.6 percent in 2011 and 2.9 percent in 2012, and with growth easing to 2.7 percent by 2013.

The recovery in Europe continues to face substantial headwinds from uncertainty surrounding sovereign debt in several euro-zone members, and a wide-reaching but necessary process of fiscal consolidation. Nevertheless, economies of Germany and France have shown increasing strength, with unemployment in Germany now well below pre-crisis levels. But in many other countries, growth is becoming constrained by fairly austere fiscal consolidation programs, ongoing banking-sector restructuring and by a skepticism regarding the financial sector that is serving to raise borrowing costs. As monetary policy enters a renewed tightening phase, additional stresses in the financial sector may become more apparent, presenting further challenges for these economies. Overall, after expanding 1.7 percent in 2010, euro-zone GDP is expected to repeat that performance in 2011, strengthening to 1.8 percent in 2012 and 1.9 by 2013, as financial-sector headwinds to growth begin to fade.

The horrible natural disaster and ensuing nuclear challenge in Japan will shape economic and human developments in that country for years to come. Despite the very real human and wealth losses associated with the crisis, its impact on GDP growth is expected to be temporary. While second-quarter GDP could decline at a 3-percent annualized rate, the pace of activity is expected to pick up to a 3-percent or 4-percent annualized rate in the final two quarters of the year—bringing whole year growth to around 0.1 percent in 2011. GDP growth is likely to increase to 2.6 percent in 2012, before settling at 2 percent in 2013—broadly in line with the country's growth potential.

Overall, global growth is projected to ease from 3.8 percent in 2010 to 3.2 percent in 2011, before picking up to 3.6 percent in both 2012 and 2013. The slowdown for high-income countries mainly reflects weak growth in Japan due to the effects of the earthquake and tsunami. Growth in the remaining high-income countries is expected to remain broadly stable at around 2.5 percent through 2013, despite a gradual withdrawal of the substantial fiscal and monetary stimulus introduced following the financial crisis to prevent a more serious downturn.