World 'unable to handle any future shocks'

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 therefore have disastrous consequences, it says. Its warnings come as the World Bank this morning 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 GDP growth, which was 3.9 per cent in 2010, will slow to 3.3 per cent this year, before rebounding to 3.6 per cent in 2012. Developing countries are expected to outstrip the performance of the West, having grown by 7.0 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 productively absorb. 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 26 January. The event brings hundreds of 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 pressing 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."

The WEF report also identified the possibility of water, energy and food shortages, and the rise of the "illegal economy". It estimated trade in illicit goods, including drugs and guns, was worth $1.3 trillion in 2009, and said organised crime and official corruption kept countries trapped in poverty.