The developing world faces the sharpest slowdown in growth since the second world war, with growth plunging from 7.9 per cent in 2007 to only 4.5 per cent in 2009, the World Bank forecast on Tuesday.
China, the fastest growing major economy, would slow to 7.5 per cent, even after taking into account the effects of a planned huge fiscal stimulus, while India's growth would decline to 5.8 per cent. Excluding these two giants, the developing world would grow only 2.9 per cent next year.
These forecasts assume that the dramatic policy interventions to shore up the global financial system and support growth in the industrialised world bear fruit - and the bank admits the risks in that picture are to the downside.
Unlike the industrialised world, emerging and low income countries as a whole would not see their economies contract outright next year, the bank predicted.
But a big gap would open up between actual and potential output in many economies, resulting in business failures, rising unemployment and declining incomes for some groups in society.
The grim new outlook highlights the extent to which the notion that the developing world could "decouple" from problems in the industrialised world has collapsed since the intensification and globalisation of the credit crunch following the collapse of Lehman Brothers in September.
Hans Timmer, a senior World Bank economist, said developing countries that had been "long resilient" to the credit crisis and weakening demand in the US had been "hit hard" by what he called a "global financial crisis since mid-September".
The bank now predicts that world trade - an engine of growth for many developing economies - will contract by 2.1 per cent in 2009.
However, Mr Timmer said developing nations were being "hit hard directly in the domestic economy" by a collapse in investment as well.
Investment is expected to slow to just 3.5 per cent in middle-income countries, down from 13.2 per cent in 2007. The investment bust follows a severe tightening in financial conditions in the developing world, and re-duced prospects for exports.
Mr Timmer said the risk premium paid on emerging market debt, especially corporate debt, "exploded" from mid-September onwards, while stock markets fell on average by about 50 per cent as banks and other financial institutions from the developed world pulled out their funds to cover losses in home markets and reduce risk.
Private sector capital flows from the developed to the developing world are now expected to decline to about $530bn (euro 408bn, pound 357bn) from a peak of about $1,000bn in 2007.
The average emerging market currency depreciated 15 per cent against the dollar in the six weeks from mid-September, with some currencies such as Brazil's real falling more sharply. This has made it more difficult for central banks in emerging economies to cut interest rates to prop up growth.
The impact on the real economy in the developing world was already evident, the bank said.
Industrial production had plunged in China and many other economies, while car sales were down 10 per cent year on year in China, down 15 per cent in India and down 30 per cent in South Africa.
The severe tightening in financial conditions has in turn aggravated the downturn in world trade. Mr Timmer said problems accessing trade finance had spread from Latin American exporters directly exposed to US banks, to other emerging economies.
Copyright The Financial Times Limited 2008