The World Bank warned nations Wednesday to brace for chaos as a new global financial crisis worse than 2008 looms. To indicate how bad the situation would be, the bank slashed its previous 2012 growth forecast for high-income countries.

The bank downgraded the projected global growth rate to 2.5 per cent in 2012 and 3.1 per cent in 2013 from previous forecasts of 3.6 per cent for both years.

For the 17-nation eurozone, the bank predicted economic contraction. The bank, in its assessment of global prospects for the next six months, expressed concern that the financial markets may stop functioning if banks refuse to roll over European debts.

"A much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic cannot be ruled out. Should this happen, the ensuing global downturn is likely to be deeper and longer-lasting than the recession of 2008-09," World Bank lead economist Andrew Burns said.

He said many nations now lack the fiscal and monetary space to stimulate the global economy or support the financial system as they did three years ago. Burns acknowledged that developing nations are in better shape than high-income countries, but because of their fewer resources, no country and region would escape the looming crisis.

For 2012, the bank revised its growth forecast for developing countries to 5.4 per cent, the second-lowest in the past decade. For high-income countries, the World Bank downgraded its outlook to a 1.4 per cent growth forecast and 0.3 per cent for the high-income euro area.

In turn, world trade, which grew by 6.6 per cent in 2011, would slow down to 4.7 per cent in 2012 but could improve to 6.8 per cent in 2013.

Burns described the next few months as a period when the world would enter a very difficult phase characterised by significant downside risks and fragility.

To help stabilise the global economy, the International Monetary Fund said it would hike the fund's resources by $500 billion. The amount would particularly be used to prop up eurozone members that are struggling to pay their debts.

However, the IMF said that based on the estimate of its staff of potential financing needs of the world, it might need $1 trillion in the coming years. The IMF said it is exploring options on funding but refused to speculate on these options until it has finished consultations with IMF members.

An Australian economist, Chris Richardson, director of Deloitte Access Economics, said that if the World Bank's forecast comes to pass, there will be more jobless Australians, company profits will be hit sharply and the country's economy will slow down even it escapes successive quarters of gross domestic product negative growth thanks to the booming resources sector.

However, Commsec chief economist Craig James found the report to be overly gloomy. He called it somewhat dated because it appears from his assessment to be written in late 2011.

He said that while the World Bank appears to be sounding a wake-up call for nations, James warned that it could scare investors.

The bleak outlook also places in question the ability of the Gillard government to fulfill its promise to return to a budget surplus by 2012-13. Acting Treasurer Bill Shorten has acknowledged that the national budget would obviously be hit and 2012 looks even more challenging compared to 2011 which was already a difficult year.

However, he emphasised that the Australian economy grew by 7 per cent compared to the period before the 2008 global financial crisis. Shorten insisted that Australia has a track record in having fought off the global recession.

Richardson explained the weak consumer confidence in Australia to negative headlines over the impact of the European debt crisis on the world and the domestic economy.

"When you have the papers and the nightly news full of reports - and rightly - that Europe is in trouble, the banks are in danger of blowing up and all the dire outcomes that would produce, you get people worrying about their own situation, even though the economic settings are very different in Australia than those of overseas," he told The Sydney Morning Herald.

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