World unable to handle any more shocks: report

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The ability of governments to respond to future shocks is at "critically low levels" after the battering of the credit crisis, according to a report from the World Economic Forum (WEF), the organiser of the Davos summit of political and business leaders.

Its annual risk assessment gives warning that the unprecedented peacetime debts racked up by governments as they fought to restore growth have left the global economy in a precarious position.

A sudden drop in asset prices, a sovereign-debt default or currency swings could have disastrous consequences, it says. Its warnings come as the World Bank releases new forecasts predicting a return to economic growth levels that would have been expected without the financial crisis, but with the recovery in the most developed nations still only "tentative".

The bank estimates that global gross domestic product growth, which was 3.9 per cent last year, will slow to 3.3 per cent this year, before rebounding to 3.6 per cent next year. Developing countries are expected to outstrip the performance of the West, having grown by 7 per cent in 2010, with 6 per cent and 6.1 per cent forecast for the next two years.

The WEF says there has been no let-up in the risks to continued growth. Western populations are ageing and global financial imbalances remain, risking excessive capital flows to emerging economies that these economies may not be able to absorb productively.

The WEF welcomed the emergence of the G20 group of major economic powers as the pre-eminent forum for global co-operation - but said the G20 had not yet proven its ability to rise to the challenges and geopolitical tensions appeared to be rising.

"Twentieth-century systems are failing to manage 21st-century risks," said Robert Greenhill, managing director of the WEF. "We need new networked systems to identify and address global risks before they become global crises."

The report, Global Risks 2011, is designed to frame debate at Davos, where the WEF's annual meeting begins on January 26. The event brings the world's most powerful politicians, bankers and business leaders to the tiny Swiss resort, where they examine the progress and problems of globalisation, brainstorm potential solutions, network and ski.

Economists say there are many issues to discuss, and highlighted long-term fiscal problems in the developed world as chief among them. "Current fiscal policies are unsustainable in most industrialised economies," said Daniel Hofmann, chief economist at Zurich Financial Services. "In the absence of far-reaching structural corrections, there will be a high risk of sovereign defaults."

- INDEPENDENT